PA 1890 s. 44

Creditors, advances, capital: order under PA 1890 s. 44

On dissolution: losses from profits, then capital, then partners. Assets: 1. creditors, 2. advances, 3. capital, 4. residue split by profit shares.

Official text PA 1890 s. 44 — United Kingdom

In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed: Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits: The assets of the firm including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order: 1 In paying the debts and liabilities of the firm to persons who are not partners therein: 2 In paying to each partner rateably what is due from the firm to him for advances as distinguished from capital: 3 In paying to each partner rateably what is due from the firm to him in respect of capital: 4 The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.

Text in force at .

Source: legislation.gov.uk — The National Archives (legislation.gov.uk), reproduced under licence Open Government Licence v3.0.

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What it actually says

Section 44 is the waterfall. Subject to any agreement, it fixes both how losses are borne and the order in which assets are applied when a partnership is wound up.

Losses, including losses and deficiencies of capital, are paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits. That last step is what turns a shortfall in the firm into a personal payment by each partner, and it uses the profit-sharing ratio - which, where nothing was agreed, is equality under section 24.

The assets, including any sums the partners contribute to make up losses or deficiencies of capital, are then applied in a strict order: first in paying the debts and liabilities of the firm to persons who are not partners; second in paying each partner rateably what is due for advances, as distinguished from capital; third in paying each partner rateably what is due in respect of capital; and the ultimate residue, if any, is divided among the partners in the proportion in which profits are divisible.

The distinction between advances and capital in steps 2 and 3 repays attention: money lent to the firm ranks ahead of money subscribed as capital, so a partner who characterised a payment as a loan rather than as capital is in a better position when there is not enough to go round. And because outside creditors come first, a partnership that dissolves owing more than it owns produces personal liability under section 9 before anyone sees a distribution.

When it applies

  • A partnership being wound up with more debts than assets.
  • Partners who contributed unequal capital arguing about what each gets back.
  • A partner who put money in as a loan rather than as capital.
  • Working out whether a shortfall must be made good personally, and in what proportions.
  • Settling accounts after one partner has given notice to dissolve.

What this section does not say

  • It does not override an agreement. The rules apply subject to any agreement between the partners.
  • It does not limit liability to creditors. Outside creditors are paid first and, if the assets are insufficient, section 9 makes the partners personally liable.
  • It does not value the business or its goodwill. Valuation is a separate exercise and often the real dispute.
  • It does not deal with an outgoing partner's share of profits earned after dissolution, which is section 42.
  • It does not decide the profit-sharing proportions. Where nothing was agreed, section 24 makes them equal.

Worked examples

Invented situations, written to show how the wording bites. They are not real cases, not judgments and not precedent, and nothing here predicts what would happen in yours.

Illustrative example

A business is closing. One partner put in forty thousand pounds of capital, the other five thousand. After the debts are paid there is about twenty thousand left, and the smaller contributor says they split it down the middle.

How the wording applies

The order in section 44 is strict: outside creditors first, then each partner rateably for advances as distinguished from capital, then each partner rateably in respect of capital, and only the ultimate residue is divided in the profit-sharing proportions. The fact that decides this is that the twenty thousand is reached at the capital stage, not the residue stage - so it is applied rateably towards the capital accounts before anything is shared equally.

How the parties settled it

They agree the remaining funds are applied to the capital accounts in proportion to the sums contributed, with the shortfall on the larger account borne equally as a loss of capital.

Illustrative example

One partner put money into the firm during a difficult year and everyone called it a loan at the time, but it was never documented. On winding up, the other partner says it was just more capital.

How the wording applies

The distinction between advances and capital decides the order of repayment: advances rank ahead of capital in the waterfall, so money lent to the firm comes back before money subscribed to it. The fact that decides which this was is how it was treated at the time - whether it was recorded as a loan, whether interest was charged or accrued under section 24 rule 3, and how it appeared in the accounts.

How the parties settled it

They agree the sum is treated as an advance up to the amount shown as a loan in the year-end accounts and as capital beyond that, with the accounts adjusted accordingly before distribution.

Illustrative example

A partnership winds up with debts exceeding its assets. One partner assumes the shortfall simply disappears with the business.

How the wording applies

Losses are paid first out of profits, next out of capital, and lastly by the partners individually in the proportion in which they were entitled to share profits. The fact that turns a shortfall in the firm into a personal payment is that last step - and where nothing was agreed about shares, section 24 makes them equal, so an unequal contribution of capital does not produce an unequal share of the deficiency.

How the parties settled it

They agree a written schedule of the shortfall and equal monthly contributions from each partner over eighteen months, with both giving the creditors a joint payment proposal on that basis.

Related sections

PA 1890 s. 24 Equal profits split, no salary rules: PA 1890 s. 24 PA 1890 s. 9 Partners Are Jointly Liable for Firm Debts: PA 1890 s. 9 PA 1890 s. 32 Partnership Dissolves by Notice or Expiry: PA 1890 s. 32 PA 1890 s. 35 Court may dissolve partnership, PA 1890 s. 35

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We copy this text from the official publisher and re-check it against that source on every page load, but we cannot guarantee it is complete, current or free of error, and we accept no liability for any reliance on it. An amendment can take effect before a consolidation catches up. The publisher's own copy is linked below; where the two differ, it is the official one that counts.

This page reproduces the text of PA 1890 s. 44 in force at the date shown and explains it in general terms. It is not legal advice and takes no account of the circumstances of your case, which can change the answer completely. For a live dispute, for limitation periods, and before taking any step in court, consult a qualified lawyer in England and Wales.

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