Multiple choice

X, Y, Z are partners in a firm and X becomes insolvent. Than

  1. the firm has to dissolve by default

  2. the firm may not be dissolved unless there is any agreement between the partners to do so

  3. the status of the firm becomes illegal from the date of adjudication of X as an insolvent

  4. X remains a partner, unless the firm is dissolved
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A Correct answer
Explanation

Under Section 34 of the Indian Partnership Act, 1932, a firm is dissolved by the adjudication of a partner as an insolvent. This is an automatic dissolution by operation of law - it happens by default and does not require any agreement between the partners. The insolvency of one partner fundamentally alters the character of the partnership relationship.

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