Highest relative capital method

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

06 October 2016 I don't have problem in the manner of distribution of cash to partners.
Suppose I have let's say 5000amt available as cash and bank loan of 2000 and creditor of 3000 so we distributed cash in ratio of 2:3 between the two and if there is partners loan in the question then it is distributed in whole after distributing the above two but not in ratio as in case of the above two..but the prblm is if there is spouse loan then it will be
distributed in ratio or given in whole.if AMT distributed in ratio it means equal preference given while distribution of AMT of cash available to secured creditors(bank loan) and unsecured creditors(creditors) so what is to be done for spouse loan.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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28 July 2024 In the context of the **Highest Relative Capital Method** for the distribution of assets among partners in a partnership firm, especially during the dissolution or winding-up process, it's crucial to understand the order of priority for settling various claims and how loans are distributed.

### **Key Points for Distribution in Dissolution**

1. **Settling Secured Creditors**:
- **Secured creditors** (such as bank loans) are paid off first from the available cash.
- The distribution of cash to secured creditors is not done in ratios but rather in full to settle their claims.

2. **Settling Unsecured Creditors**:
- **Unsecured creditors** (such as suppliers or trade creditors) are paid next.
- The cash is distributed among unsecured creditors in the ratio of their claims, after settling the secured creditors.

3. **Partner’s Capital Accounts**:
- After settling creditors, the remaining cash is distributed among partners based on the highest relative capital method. This method considers the ratio of the partners' capital accounts and the amount of cash available after paying off liabilities.

4. **Partner’s Loans**:
- Loans from partners are generally considered as part of the firm's liabilities and are settled after paying off external creditors but before distributing any remaining cash to partners' capital accounts.
- If partners have provided loans to the firm, these are usually repaid in full after settling all creditors and before distributing the remaining cash to the capital accounts of the partners.

5. **Spouse’s Loan**:
- Loans from a spouse (or any related party) are treated like other loans. The priority of repayment follows the same hierarchy as other loans.
- If the spouse's loan is secured, it should be settled before unsecured loans, similar to how you handle bank loans.
- If the spouse’s loan is unsecured, it will be treated as part of the general unsecured creditors and repaid in the proportion of the claims of unsecured creditors.

### **Illustrative Example**

**Assume the following scenario**:

- **Available Cash**: $5K
- **Bank Loan (Secured)**: $2K
- **Trade Creditors (Unsecured)**: $3K
- **Partner A’s Capital**: $5k
- **Partner B’s Capital**: $2k
- **Partner’s Loan from Partner A**: $1k
- **Spouse Loan (Unsecured)**: $500

**Distribution Process**:

1. **Pay Secured Creditors (Bank Loan)**:
- Total Bank Loan: $2k
- Cash Available After Paying Bank Loan: $5k - $2k = $3k

2. **Pay Unsecured Creditors**:
- Total Trade Creditors: $3k
- Cash Available After Paying Unsecured Creditors: $3k - $3k = $0
- No cash remains to distribute to the partners or to pay the spouse loan.

3. **Pay Partner’s Loan**:
- Partner’s Loan: $1k
- The loan cannot be paid as there is no remaining cash.

4. **Pay Spouse Loan**:
- Spouse Loan: $500
- As there is no remaining cash, the spouse loan also remains unpaid.

**Remaining Cash Distribution**:
- **Remaining Cash**: $0
- All available cash has been used to settle bank loans and trade creditors.

**If there was any remaining cash** after paying all creditors, it would then be distributed among partners’ capital accounts based on the highest relative capital method. However, in this example, no cash remains for further distribution.

### **Conclusion**

- **Secured loans** (e.g., bank loans) are settled first.
- **Unsecured loans** (e.g., trade creditors, spouse loans) are settled next in proportion to their claims.
- **Partners’ loans** are settled after all external creditors.
- **Partner’s capital** is distributed after all creditors and loans are settled, according to the highest relative capital method.

If the cash available is insufficient to cover all claims, the creditors and loan amounts are settled as per the priority, and the remaining claims will be proportionally settled or remain unpaid.

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