Joint Venture Deadlock and Exit Options When a Partner Enters CIRP

When a joint venture partner is admitted to the corporate insolvency resolution process under Section 14 of the Insolvency and Bankruptcy Code, 2016, a moratorium freezes dealings with that partner's own assets, including its joint venture shareholding, but the joint venture company itself remains a separate, solvent legal person outside the Code. Its board keeps functioning only while the insolvent partner's nominee directors stay in place, and most standard exit mechanisms, including call options and drag-along rights, cannot complete because they require a disposal the moratorium prohibits. This article sets out what happens to the joint venture agreement, which exit routes survive, and what the solvent partner should do first.

Is the Joint Venture Company Itself Insolvent?

The most common analytical error here is treating the joint venture company as the insolvent entity. It is not. Where partner A is admitted to CIRP, the corporate debtor is A. The joint venture remains a separate legal person, solvent, trading and outside the Code.

That distinction drives everything else. Section 14 of the Code imposes the moratorium on proceedings against the corporate debtor and on dealings with its assets. A's shareholding in the joint venture is an asset of A and sits inside the moratorium. The joint venture's plant, receivables and contracts are its own and do not. The Explanation to section 18 confirms the point: for the purposes of the interim resolution professional's duty to take control of assets, the term excludes the assets of an Indian or foreign subsidiary of the corporate debtor. A resolution professional appointed over A has no mandate over the joint venture's operations, and counsel should say so early if the attempt is made.

What the Moratorium Freezes and What It Leaves Alone

Section 14(1) bars four things: institution or continuation of proceedings against the corporate debtor; transfer, encumbrance, alienation or disposal by the corporate debtor of its assets or of any legal right or beneficial interest in them; enforcement of security over its property; and recovery of property it occupies. None of that reaches the joint venture company. Its suppliers may sue it and its lenders may enforce against it.

What clause (b) does catch is any mechanism whose end point is a compulsory transfer of A's joint venture shares. A call option completed by a transfer form executed on A's behalf is precisely a disposal by the corporate debtor. In any event, once the interim resolution professional is appointed the powers of A's board stand suspended under section 17(1)(b) and vest in him, so nobody at A can sign.

Insolvency Termination Clauses and the Limits of Gujarat Urja

Every joint venture agreement contains an insolvency event of default, usually entitling the solvent partner to terminate, to call for the defaulting partner's shares, or both. The first limb turns on the treatment of ipso facto clauses.

In Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta [(2021) 7 SCC 209] the Supreme Court restrained a power purchaser from terminating a power purchase agreement where the sole ground was the counterparty's admission to CIRP, holding that section 60(5)(c) confers residuary jurisdiction on the National Company Law Tribunal (NCLT) over disputes arising out of or in relation to the insolvency, and that this jurisdiction is not confined to the acts prohibited by section 14. The decision is regularly over-read. The Court rested on the facts before it: the agreement was the corporate debtor's sole source of revenue and its termination meant certain liquidation. The Code contains no general prohibition on insolvency-triggered termination, and the Insolvency and Bankruptcy Code (Amendment) Act, 2026, most of which took effect on 26 May 2026, did not introduce one. Section 14(2) protects only supplies of essential goods and services to the corporate debtor.

A solvent partner terminating a joint venture agreement therefore stands on firmer ground than the terminating party in that case, unless the joint venture happens to be the corporate debtor's principal business, which in single project ventures it frequently is. Make that assessment before serving notice, because the remedy sought against a wrongful terminator is an injunction from the NCLT and it tends to arrive quickly.

Which Joint Venture Exit Mechanisms Survive a Partner's CIRP?

Terminating the contract is the easy half. The equity is the difficult half. Every mechanism below assumes a counterparty who can decide, sign and pay. In CIRP that counterparty is a resolution professional whose duty under section 25(2)(a) is to preserve and protect the corporate debtor's assets, who cannot dispose of them during the moratorium, and who answers to a committee of creditors (CoC) voting at sixty-six per cent.

Pre-emption Rights, Messer Holdings and Regulation 29

Pre-emption deserves separate treatment because counsel assume it is the strongest right in the document. As a matter of company law it is a good right. In Messer Holdings Ltd. v. Shyam Madanmohan Ruia [(2010) 159 Comp Cas 29 (Bom)] a Division Bench of the Bombay High Court held that a consensual arrangement between shareholders of a public company restricting the transfer of their own shares, including a right of first refusal, is enforceable as a contract and does not offend the free transferability principle then contained in section 111A of the Companies Act, 1956. The proviso to section 58(2) of the Companies Act, 2013 now codifies that position by making any contract or arrangement between two or more persons in respect of the transfer of securities enforceable as a contract.

None of that helps against the Code. Regulation 29 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 permits a resolution professional to sell unencumbered assets of the corporate debtor outside the ordinary course of business with sixty-six per cent CoC approval, subject to an aggregate book value cap of ten per cent of admitted claims, and states that a bona fide purchaser takes free and marketable title notwithstanding the corporate debtor's constitutional documents, any shareholders agreement or any joint venture agreement. That is about as direct a statutory override of a pre-emption clause as Indian law contains. A partner who wants the stake should be bidding for it rather than writing letters about the transfer restrictions clause.

Deadlock in the Boardroom Arrives Before Any Argument About Options

The corporate debtor's own board is suspended under section 17(1)(b). The directors it nominated to the joint venture board are not: they hold office in the joint venture under the Companies Act, 2013 until they resign or are removed. In practice they resign quickly, because the same individuals are usually officers of the corporate debtor and have little appetite for fiduciary exposure at a company they can no longer influence. Some agreements accelerate matters by deeming an insolvency event to vacate the nominee seats automatically, a drafting choice that looks tidy and produces the deadlock faster.

Once the seats are empty, the articles do the damage. A constitution requiring at least one nominee of each partner to be present for a valid board quorum cannot produce a quorate board at all. Section 174 of the Companies Act, 2013 sets a statutory floor of one third of total strength or two directors, whichever is higher, but joint venture articles sit above that floor by design. The problem repeats at general meeting level. Section 103 provides for adjournment where quorum fails and, in the ordinary case, for the members present at the adjourned meeting to constitute the quorum, but that default yields to a contrary provision in the articles, and joint venture articles routinely provide otherwise.

Reserved matters finish the job. Annual budgets, capital expenditure above a threshold, borrowing and any change to the business plan usually require the affirmative vote of both partners. That vote now belongs to the resolution professional, who is exercising the corporate debtor's shareholder rights and who will ask of each item only whether approving it preserves the value of the corporate debtor's stake. The filter is rational, it is slow, and it is not a commercial partner's filter.

The first operational step is correspondence, not litigation. Write to the resolution professional within days of the public announcement, confirm who exercises the corporate debtor's votes and by what authority, ask whether the nominee directors will continue, and propose a standing arrangement for routine reserved matters so that the venture can keep operating. Where he will not engage, section 60(5)(c) is available and the NCLT seised of the corporate debtor's CIRP is the forum.

Capital Calls, Anti-Dilution and the Venture's Own Lenders

Funding is where the solvent partner retains genuine leverage, because a subscription for new shares is an act of the joint venture company and not a transfer by the corporate debtor. Section 14(1)(b) does not bite on it.

Where the agreement permits a non-defaulting party to subscribe the shortfall and the joint venture is a private company, the mechanics run through section 62 of the Companies Act, 2013: the offer goes to existing shareholders in proportion, the resolution professional takes it up or lets it lapse, and the solvent partner subscribes the balance. The corporate debtor's percentage falls. Expect an application under section 60(5) alleging value destruction. It should be resisted successfully where the issue price came from an independent registered valuer and the process followed the articles. It will not be where the agreement imposes a punitive dilution ratio. A formula that dilutes a defaulting partner at twice the fair value discount is a gift to the resolution professional's counsel and, in a private joint venture, an invitation to a petition under sections 241 and 242 of the Companies Act, 2013.

Sponsor obligations run in the opposite direction. Shortfall undertakings, cost overrun guarantees and equity support agreements given by the insolvent partner become claims against the corporate debtor, to be filed with the interim resolution professional in the prescribed form within the period stated in the public announcement. A contingent or unascertained claim is filed at a best estimate rather than not filed at all.

The joint venture's own facility documents need reading in the same week. Project financings routinely define an event of default by reference to the insolvency of a sponsor, or treat a shift in sponsor ownership as a change of control requiring lender consent. A joint venture trading profitably can therefore be in default the day its partner is admitted, with no cure available to it. Open waiver discussions before the lender's credit committee forms its own view, and assume the solvent partner will be asked to increase its support as the price of that waiver.

What Happens to the Joint Venture Stake Under a Resolution Plan?

The outcome joint venture agreements least often anticipate is the usual one. A resolution plan approved under section 31 of the Code generally transfers control of the corporate debtor itself, by extinguishing existing share capital and issuing fresh equity to the resolution applicant. The corporate debtor survives as a legal person. Its holding in the joint venture never moves, and the joint venture's register of members is unchanged. What has changed is that the partner is now controlled by a stranger, occasionally a competitor.

Pre-emption rights, rights of first refusal and transfer restrictions drafted around a transfer of joint venture shares simply do not fire on that event. What fires, if anything, is a change of control provision defined at partner level. Agreements defining change of control by reference to ultimate beneficial ownership will catch it; those pegged to a named parent, or carving out transfers required by law or by order of a tribunal, will not.

Even a clause that fires then meets section 31. The approved plan binds the corporate debtor, its members, creditors, guarantors and other stakeholders, and section 31(6), inserted by the 2026 Amendment and in force from 26 May 2026, extinguishes claims against the corporate debtor and its assets that predate approval. A damages claim for breach of a change of control covenant sits on the wrong side of that line. Whether an injunction enforcing a proprietary pre-emption right survives is a harder question and remains unresolved.

Four routes stay open and they are not mutually exclusive. The first is a negotiated purchase of the stake from the resolution professional, priced so that the CoC can defend it as value maximisation. The second is participation in the process itself, either as a resolution applicant for the corporate debtor or as a purchaser under regulation 29, subject to eligibility under section 29A. The third is an application under section 60(5)(c) where the resolution professional or the plan interferes with a right that can be articulated as something more than a money claim. The fourth is to end the venture, by a voluntary liquidation under section 59 of the Code if the joint venture is solvent and the resolution professional will vote for it, or by a petition on just and equitable grounds under section 271(e) of the Companies Act, 2013 where the substratum has gone.

A petition under sections 241 and 242 is often raised at this stage and is usually the weakest of the options, because section 14(1)(a) bars the institution of proceedings against the corporate debtor for as long as the moratorium runs, and a petition naming the insolvent partner as respondent will not get past that objection. A petition against the joint venture company alone, complaining about a shareholder who is no longer directing anything, tends to attract a remedy the petitioner did not want.

Frequently Asked Questions

Does the moratorium stop the joint venture company from trading?

No. The moratorium under section 14 attaches to the corporate debtor, which is the partner. The joint venture company is a separate legal entity and is not in insolvency. It continues to trade, to sue, to be sued and to enforce its contracts. Only dealings with the partner's shareholding are affected.

Can you terminate the joint venture agreement because your partner is in CIRP?

Most agreements permit it contractually. Whether it holds depends on how central the venture is to the corporate debtor. Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta shows the NCLT will restrain a termination whose only ground is insolvency where the contract is the corporate debtor's sole revenue source. Where the venture is one of several businesses, termination is far more likely to stand. Take that assessment before serving notice, not after.

Who exercises the insolvent partner's vote at a joint venture general meeting?

The resolution professional, because the powers of the corporate debtor's board are suspended under section 17(1)(b) and vest in him. Ask him in writing to confirm the position and to nominate a named individual to attend, and keep that confirmation for the joint venture's minute book.

Can an insolvency call option be enforced against the resolution professional?

Not unilaterally. Completion requires a transfer of the corporate debtor's shares, which section 14(1)(b) prohibits during the moratorium. The option can only be given effect with the resolution professional's cooperation and CoC approval, which in substance converts the clause into a negotiation about price.

Does a pre-emption right survive a sale by the resolution professional?

As between shareholders the right is enforceable as a contract, and the proviso to section 58(2) of the Companies Act, 2013 confirms that. Against a sale under the Code it is weak, because regulation 29 gives a bona fide purchaser free and marketable title notwithstanding a shareholders agreement or a joint venture agreement. Registering the right is worth doing; relying on it to block a Code sale is not.

What should you do about a capital call the insolvent partner cannot meet?

Decide early whether the venture is worth funding alone. If it is, run the shortfall subscription through section 62 of the Companies Act, 2013 at a price fixed by an independent registered valuer, document the process against the articles, and avoid any punitive dilution formula. Fair value dilution is defensible; penal dilution invites an application under section 60(5).

Do transfer restrictions bite when the partner is taken over under a resolution plan?

Usually not. The plan changes ownership of the partner, not of the joint venture shares, so a clause drafted around a transfer of joint venture shares is never triggered. Only a change of control provision defined at the partner's ultimate ownership level will catch it, and even then section 31(6) may extinguish the resulting claim.

Can the solvent partner buy the insolvent partner's stake directly from the resolution professional?

Yes, and this is usually the most reliable route. A solvent partner can negotiate a purchase of the corporate debtor's shareholding directly with the resolution professional, priced so the committee of creditors can defend the sale as value maximisation, or acquire the stake through a regulation 29 sale of unencumbered assets under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, subject to sixty-six per cent committee approval. Both routes work with the resolution professional's cooperation rather than by unilaterally exercising a contractual call option, which the moratorium under Section 14 blocks.

What happens to sponsor guarantees or shortfall undertakings given by the insolvent partner?

They convert into claims against the corporate debtor. Shortfall undertakings, cost overrun guarantees and equity support agreements given by the insolvent partner must be filed with the interim resolution professional in the prescribed form within the period stated in the public announcement of the corporate insolvency resolution process. A contingent or unascertained claim should still be filed, at a best estimate, rather than left out, because a claim not filed within the process risks being treated as extinguished once a resolution plan is approved.

Can the joint venture's own lenders treat the partner's insolvency as an event of default?

Often yes. Project financing documents for the joint venture routinely define an event of default by reference to the insolvency of a sponsor, or treat a change in sponsor ownership as requiring lender consent, so a joint venture that is trading profitably can still find itself in default the moment its partner is admitted to the corporate insolvency resolution process. Because no cure is usually available for that kind of default, the solvent partner should open waiver discussions with the lender's credit committee immediately, and should expect to be asked for increased support as the price of the waiver.

Is a drag-along right against the insolvent partner enforceable during CIRP?

Not as a compulsion. A drag-along clause held by the solvent partner would ordinarily compel the corporate debtor to transfer its joint venture shares, and that transfer is exactly what the moratorium under Section 14(1)(b) of the Insolvency and Bankruptcy Code, 2016 prohibits for as long as the corporate insolvency resolution process runs. The clause does not disappear, but it functions as a commercial lever in negotiations over the resolution plan rather than as a right the solvent partner can enforce directly against the resolution professional.

Can a tag-along right be exercised against the resolution professional?

Yes, in principle. A tag-along right held by the insolvent partner is triggered by the solvent partner's own sale of its stake, and it is a valuable right that the resolution professional is obliged to assert on the corporate debtor's behalf as part of preserving asset value under Section 25(2)(a) of the Insolvency and Bankruptcy Code, 2016. A solvent partner planning a third party sale of its own shareholding should price the tag-along into that transaction and budget for the resolution professional to enforce it.

What is the first practical step a solvent partner should take once its JV partner enters CIRP?

Correspondence, not litigation. The solvent partner should write to the resolution professional within days of the public announcement of the corporate insolvency resolution process, ask for confirmation of who now exercises the corporate debtor's votes and under what authority, ask whether the corporate debtor's nominee directors on the joint venture board will continue, and propose a standing arrangement for routine reserved matters so the venture can keep operating. Where the resolution professional will not engage, Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 gives the National Company Law Tribunal residuary jurisdiction to intervene.

Can a solvent partner file an oppression and mismanagement petition against the insolvent partner?

Rarely with success while the moratorium is in force. Section 14(1)(a) of the Insolvency and Bankruptcy Code, 2016 bars the institution of proceedings against the corporate debtor for as long as the corporate insolvency resolution process runs, so a petition under Sections 241 and 242 of the Companies Act, 2013 naming the insolvent partner as respondent will not get past that objection. A petition against the joint venture company alone, complaining only that a shareholder is no longer directing anything, tends to invite a remedy the petitioner did not actually want.

Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency and Corporate Practice at the law firm Vikrant D. Shetty & Associates, Advocates & Solicitors, which advises Indian and international clients on joint ventures, shareholder agreements and commercial contracts, and represents financial creditors, operational creditors and corporate debtors in proceedings before the National Company Law Tribunal, Mumbai Bench, and in related matters before the Bombay High Court.

Buy-out discussions with a resolution professional are almost always conducted without prejudice, and the protection that label gives is narrower than many assume. Related reading: the without prejudice rule and its exceptions under Indian law.

This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please seek direct consultation with an advocate.