Chapter VI - Dissolution of a Firm
Section 48
Section 48: Settlement of accounts after dissolution
Section 48 provides default rules for absorbing losses and applying assets when a dissolved firm's accounts are settled.
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Need advice on Section 48?
This article is for general information. Refer to the Indian Partnership Act, 1932 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed:—
(a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.
(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:—
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital;
(iii) in paying to each partner rateably what is due to him on account of capital; and
(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.
Central rule and applicability
Subject to agreement, losses including capital deficiencies are met first from profits, then capital, then individual partner contributions in profit-share proportions if necessary. Assets, including contributions to meet capital deficiencies, are applied to third-party debts, partner advances distinct from capital, partner capital, and finally residue in profit-share proportions. Partner advance and capital tiers are paid rateably.
Limits and related provisions
The loss-absorption order and asset-payment order answer different questions and should not be mixed. A partner loan or advance must be distinguished from capital. The partners' agreement matters, but third-party creditor rights and any applicable insolvency priorities require separate review; internal terms should not be assumed to override them.
Hypothetical business example
Hypothetical: After paying outside creditors, a dissolved firm has insufficient funds to repay all partner advances and capital. The accounts distinguish those categories and apply the relevant order and rateable treatment instead of repaying the first partner who requests a withdrawal.
Practical decision flow
Prepare complete asset, external-debt, partner-advance, capital and profit-share schedules.
Check the agreement and calculate loss absorption separately from the asset distribution sequence.
Apply the relevant order and rateable amounts, documenting any shortfall and separate creditor or insolvency considerations.
Check the applicable state law
This guide explains the central Section 48 baseline. State amendments, notifications and rules can affect its application. Confirm the law applicable to the firm's location and the relevant partnership agreement before acting.
Practical checklist
Do
- Prepare complete asset, external-debt, partner-advance, capital and profit-share schedules.
- Check the agreement and calculate loss absorption separately from the asset distribution sequence.
- Apply the relevant order and rateable amounts, documenting any shortfall and separate creditor or insolvency considerations.
Avoid
- The loss-absorption order and asset-payment order answer different questions and should not be mixed. A partner loan or advance must be distinguished from capital. The partners' agreement matters, but third-party creditor rights and any applicable insolvency priorities require separate review; internal terms should not be assumed to override them.
Glossary
- Rateably
- In the corresponding proportions within the relevant repayment category.
- Capital deficiency
- A shortfall in capital addressed within the section's loss rules.
Frequently asked questions
Are partner advances and capital the same category?
No. The section expressly distinguishes them and places advances before capital in its stated order.
How is the final residue shared under the default?
In the proportions in which the partners were entitled to share profits.
Is the section unaffected by the partnership agreement?
No. It expressly states that the rules are subject to agreement by the partners.
Need help applying this provision to your situation?
Contact BizeneedLast updated 10 October 2026