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.