Insolvency of a Partner

24th January 2021 0 By indiafreenotes

An insolvent is a person unable to pay or settle his just debts. When a person or a partnership firm or Hindu undivided family is not able to meet its liabilities and is in financial difficulties, the Court intervenes, at the instance of the creditors or the debtor himself, and brings about a settlement whereby the debtor surrenders his entire property and obtains freedom from having to pay his debts. A joint stock company may also be insolvent but the necessary action in this respect is taken under the Companies Act the company has to be wound up and its assets realized and distributed in accordance with that Act.

  • 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.
  • 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.

Individuals and Partnerships:

There is one chief difference between insolvency of individuals and partnership firms. In case of individuals, no distinction is made between private assets and business assets and similarly for liabilities.

In case of partnership, a distinction between firm’s liabilities and assets and private liabilities and assets of partners is made. Private assets must first be utilized for paying private liabilities. If there is a surplus, it is utilized to pay firm’s liabilities.

Firm’s assets must first be utilized to pay firm’s liabilities and, if there is a surplus, a partner can utilize his share of the surplus to pay his private liabilities. It should be noted that a minor partner is not liable to contribute to the assets of the firm out of his private estate. In his case, therefore, the firm’s creditors will not be able to look to his private estate for satisfaction of their claims. In other words, the private estate and private liabilities of a minor partner will be kept totally separate from those of the firm.


Statement of Affairs:

When a person or a firm is adjudicated as insolvent, he or the firm has to prepare a statement showing the financial position. The true financial position can be shown by preparing a sort of balance sheet. The only point to remember is that the “balance sheet” must show the assets at realizable value and not at book value. The purpose is to show how much money will be available for distribution among creditors and, therefore, for this purpose assets should be put down at the figure they are expected to fetch. All liabilities should be recorded. This can be done by setting down assets at their realizable value and the amount payable to creditors.

Preferential Creditors:

Out of the unsecured creditors, some have to be paid, under the law, before others. Such creditors are known as preferential.

By law, the following are the Preferential Creditors:

(a) All debts due to Government or local authority.

(b) The salary of any clerk in respect of services rendered to the insolvent during four months before the date of the presentation of the petition, not exceeding Rs 300 for each such clerk. (In case of the Provincial Insolvency Act, the maximum amount per clerk is Rs 20).

(c) The wages of any servant or labourer in respect of services rendered to the insolvent during four months before the date of the presentation for the petition not exceeding Rs 100 for each such labourer or servant (Rs 20 in case of Provincial Insolvency Act).

(d) Rent due to the landlord not exceeding one month’s rent. (Rent is not preferential under the Provincial Insolvency Act.)

Deferred Creditors:

In England some creditors are treated as deferred and cannot be paid till others are paid off.

Such creditors are:

(a) Loan from wife to husband or from husband to wife;

(b) Creditors whose rate of interest varies with profit; and

(c) Creditors for goodwill who take a share of profit.

Deficiency Account:

In addition to various statements (A, B, C, D, E, F and G) and the Statement of Affairs, the debtor must also prepare an account showing how the capital introduced by the proprietor came to be lost along with amounts belonging to creditors. In other words, the deficiency appearing in the statement of affairs must be explained. The method to prepare it is simple. On the left hand side is put the capital plus all that increases capital, viz., profit or interest on capital or salary to proprietor.

On the right hand side, losses and withdrawals (all that decreases capital) are put. In case of a sole trader, any surplus of household assets over household liabilities should be put on the left hand side. If household liabilities exceed household assets, the difference should be put on the right hand side. The difference between the right hand side and the left hand side is deficiency. It must agree with the figure appearing in the statement of affairs. The account must cover the period specified by the Official Receiver.