Before we learn about Insolvency of a Partner, the term “insolvency” refers to a situation when the person is no more capable of repaying its debts. It is only when a person has been declared insolvent, the bankruptcy proceedings begin. In other words, it is a position of financial distress when the business or the individual is unable to repay its debts.
Now, Insolvency of partner, means when the partner is not capable of repaying his debts.
We have also extensively written about Minor in a partnership, Rights and Duties of Partners in Partnership, Partnership: Liability to third parties, Indian Partnership Act: Section 9 & 20-29
Table of Contents
Who is insolvent partner?
Any partner who is unable to pay its debts in the usual course of business and has been declared to be insolvent by the appropriate court is an insolvent within the meaning of this Act.
What is the effect of Insolvency of a Partner?
In case of insolvency of a partner, he ceases to be a partner on the date on which he is adjudicated as an insolvent by the appropriate court or tribunal irrespective of the fact that the firm is dissolved or not. Where under a contract the firm is not dissolved because of a partner becoming insolvent, thereafter from such order of adjudication the estate of the insolvent partner shall not be liable for the act of the firm and the firm shall not be liable for the act of the insolvent partner.
Ordinarily, but not invariably, the insolvency of partner results in the dissolution of a firm; but the partners are competent to agree among themselves that the adjudication of a partner as an insolvent will not give rise to the dissolution of the firm.
34. Insolvency of a partner.—(1) Where a partner in a firm is adjudicated an insolvent he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is hereby dissolved.
Section 34 of the Indian Partnership Act, 1932
(2) Where under a contract between the partners the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent, done after the date on which the order of adjudication is made.
Insolvency of Partner Case Laws
Here’s a list of few important case laws:
- Kancherla Achiraju vs Kusumanchi Rayalu And Ors. on 17 July, 1963 Equivalent citations: AIR 1964 AP 498
- Gopal Naidu v. Mohanlal Kanyalal, 49 Mad LJ 709 : (AIR 1926 Mad 206)
- In Siva Reddi v. Official Receiver, Bellary, AIR 1937 Mad 13
- Kissendoss v. Khatau Makanjee Spinning And Weaving Co. Ltd.
- Devji Goa And Others v. Tricumji Jivandas And Others Opposite Parties.
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