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Section 262: Sections 239 to 266 [Repealed by the Indian Partnership Act, 1932]

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Act 1872
Section 75 All 266 Sections of Indian Contract Act Section 77

Legal Commentary & Landmark Judgments: Section 262

Section 262 historically enacted the foundational bankruptcy and insolvency rule of marshaling partnership assets, providing that firm property must be applied in the first instance to pay partnership debts, and separate property of partners to pay separate debts, now reenacted as Section 49 of the Indian Partnership Act, 1932.

  • Statutory Marshaling of Firm Assets: Partnership property must be applied primarily in payment of the debts of the firm; only if there is a surplus may the share of each partner be applied in payment of his separate debts.
  • Priority of Separate Creditors on Separate Estates: The separate property of any partner must be applied primarily in the payment of his separate debts; only the surplus may be utilized to satisfy firm debts.
  • Dual Priority Protection: Protects trade creditors by preventing partners' private personal creditors from seizing commercial partnership inventory, while safeguarding private creditors from premature competition with firm creditors.
  • Modern Reenactment in Section 49 IPA 1932: Repealed by Act 9 of 1932 and reenacted as Section 49 of the Indian Partnership Act, 1932, mirrored in Section 49 of the Provincial Insolvency Act, 1920.
Key Landmark Precedents:
  • Addanki Narayanappa v. Bhaskara Krishtappa AIR 1966 SC 1300: A Constitution Bench held that a partner's interest in the firm is his share of the surplus after partnership property is applied to discharge all partnership debts, affirming the statutory rule of priority.
  • Ex parte Cook (1728) 2 P Wms 500: The historic English authority laying down the rule of joint and separate estates followed in Section 262 and modern Section 49 of IPA 1932.
  • CIT v. Bagyalakshmi & Co. AIR 1965 SC 1708: The Supreme Court recognized that the application of firm assets to joint liabilities before separate distribution is an inherent statutory attribute of the partnership relation.
Courtroom Practice & Strategic Litigation Guidance:

In liquidation, insolvency, or debt recovery proceedings involving a partner, file an application for marshaling under Section 49 of IPA 1932. Resist any attachment of firm assets by an individual partner's personal judgment creditor until all joint commercial liabilities are completely liquidated.

Section 75 All 266 Sections of Indian Contract Act Section 77