Legal Framework and Procedure for Joint Venture dissolution in India

Importance and relevance of business depends on supplying products and services to customers. Now a days, entrepreneurs who supply goods and services fulfill all the responsibility of organizing and managing a business. They also take risks to establish businesses to generate profit.

Business optimally utilizes limited resources such as personnel, machinery, and materials for producing goods. One method of conducting a business endeavor is by forming a strategic partnership with one or more individuals or entities typically for a specific business initiative, which is commonly referred to as a Joint Venture.

There are numerous benefits of establishing a Joint Venture compared to the traditional approach of running a business, including providing companies with the chance to acquire new capabilities and expertise, access to larger resources and capital especially in terms of personnel and technology, sharing risks with the joint venture partners, and the finite duration of joint ventures. Joint Ventures need huge financial resources for smooth functioning, So, it is very important to have already established strategic plans. Hence, both the parties need to focus on the future of the growth of partnerships, rather than solely on immediate gains.

Ultimately you will see that both the long-term and short-term achievements will be significant. To attain this success, honesty, integrity, and communication within the joint venture are essential.

What is a Joint Venture?

A Joint Venture can be described as a contractual arrangement or a business association between two or more individuals aimed at carrying out a specific business project. Each party consents to participate in the profits and losses of the venture.

Types of Joint Ventures

The two options available for establishing a joint venture in India are:

Contractual joint venture:

In a contractual joint venture, a new entity that is jointly owned is not established. There exists an agreement for collaboration, yet there is no agreement to establish an entity that is owned by the collaborating parties. The two parties do not possess shared ownership of the business entity, but each party exercises certain aspects of control in the joint venture. A common illustration of a contractual joint venture is the relationship between a franchisee and franchisor.

 
Equity based joint venture:

An equity joint venture agreement refers to an arrangement where a distinct business entity, jointly owned by two or more parties, is established based on the accord of the parties involved. The essential operative element in this scenario is shared ownership among two or more parties. The type of business entity can differ – company, partnership firm, trusts, limited liability partnership firms, venture capital funds, etc. From the perspective of a foreign company, the most favorable types of business entity are either a company or a limited liability partnership firm.

 

What is Joint Venture Dissolution?

The dissolution of the Joint Venture does not occur automatically as it is arranged in accordance with the completion of the project. There can also be numerous reasons for the dissolution of the joint venture, which include:

• The joint venture agreement contains the predetermined decision made after receiving approval from all parties involved, and the dissolution specifics are outlined in the initial joint venture contract. Typically, the joint venture agreements are established to achieve a particular objective, which might be attained sooner than anticipated in some scenarios, due to the availability of various resources; in such instances, the parties may choose to dissolve the joint venture agreement.
• If the parties determine that the joint venture is no longer yielding profits, they may opt to dissolve the joint venture agreement. The parties also assess the feasibility of the joint venture business. Since the parties convene to create a joint venture agreement due to its adaptability, a lack of which may impede other business activities, in such cases, the parties might seek to dissolve the joint venture agreement.
• If a member of the joint venture passes away or loses the ability to operate as stipulated in the joint venture agreement, the remaining parties can proceed with their terms and thus dissolve the joint venture agreement.

What Are the Requirements to dissolve the Joint Venture Agreement?

To legitimize the dissolution process, specific minor adjustments differ by jurisdiction based on the legislative requirements. Nonetheless, the standard requirements are listed below:

• The explicit intentions of the parties must have been articulated in the agreement, and the dissolution must take place solely on that occasion.
• The intent of these parties must have been conveyed to all the parties via agreement or verbal communication. However, the courts do not require the parties to fulfill any obligations related to notifying the parties of the termination.
• The attorneys insist the parties incorporate “cancellation clauses” in the joint venture agreement to prevent any legal complications in the future. For example, if the joint venture agreement pertains to real estate and the parties concur to build an office structure, they may become disillusioned with the time required to achieve their mutual objectives. In such situations, the attorneys will review the agreement and search for any cancellation clauses related to the delays.

 

Dissolution in a Contractual Joint Venture

A joint venture agreement, if not skillfully written to improve the exit process, increases the chance of Dissolution if there is frequent mention of the exit clauses, which indicates a troubled relationship between the parties, and if there are strict clauses, it may deter a partner interested in forming an agreement.

It is therefore essential to incorporate clauses that (clearly and simply) establish the rights of the parties, restrict the liability of a non-defaulting party, and provide a straightforward exit mechanism if the relationship deteriorates. The applicable law that regulates the relationship between the parties entering a contractual joint venture is the Indian Contract Act, 1872, and the Specific Relief Act, 1963. If a non-defaulting party, in the event of a breach or default, intends to preserve the relationship, it may seek recourse from a court of law requesting specific performance to compel the defaulting party to meet its obligations.

In the instance there is no choice but to dissolve the contractual joint venture, the following steps are to be carefully considered:

• Change of Control – Any changes in the ownership of joint venture business have significant consequences for the opposing party. Hence, it is important to concentrate on the clause by ending the joint venture agreement or renegotiate the terms if the need arise. The clause could also be worded in such a way that consent from the counterparty is required prior to the change in control of the business.
• Financials – A termination could result in a disagreement between the parties participating in the joint venture regarding the condition of the company's financials. Creating a clause that would oblige an existing party if any financial support is provided to it is a suggested measure.
• Assets – Another problem that might occur right after the end of a joint venture involves the assets bought during the joint venture. It is crucial to establish the ratio for asset distribution. In this context, assets can be both tangible and intangible — including intellectual property rights. If there isn’t a specific clause that addresses this matter, the conflict may be settled by requesting the courts to step in. Courts may distribute the assets in proportion to the capital contributed for acquiring them.
• Limitation of Liability – A provision in this respect needs to be thoughtfully evaluated and should be formulated in a way that restricts a party's liability based on their contribution to the establishment of the firm.
• Goodwill & Confidential Information – It is essential to create a clause in which the ownership of the goodwill and the confidential information generated during the business operations is preserved and may also be enhanced with extra safeguards through an assignment in the event of a change in the company's control.
• Arbitration – Post-termination, in cases where disagreements or disputes arise, it is essential to initially attempt to settle the matter through alternative dispute resolution methods. The courts in India also recommend that parties seek to resolve their disputes through alternative means to lessen the load on the courts.
• Non-Compete & Non-Solicitation – Though the overarching principle in the Indian Contract Act is that agreements limiting trade are illegal, as a notable exception, a negative or restrictive covenant may be included to prevent such unfair practices, considering the unfair competition or monopolies that might arise due to a party leveraging the know-how acquired during the joint venture.

Dissolution of Joint Venture in Equity

A formal joint venture can be established through the formation of a corporate entity, which may be either a company or a Limited Liability Partnership (LLP). In cases of Dissolution, the regulations that govern the winding up of formal joint ventures include statutes such as the Companies Act, 2013, the Limited Liability Partnership Act, 2008, and the Insolvency and Bankruptcy Code, 2016. For both companies and LLPs, whether the Dissolution is voluntary or mandated by an order from the respective tribunals, a liquidator must be appointed who will be responsible for evaluating the assets and settling any outstanding debts and obligations. Subsequently, in accordance with priority, the remaining assets will be distributed among the shareholders.

In the equity Joint Venture, the dissolution will be done in the following ways:

• If there was a deadlock in the Company.
• If the relationship between the Companies was finished and they turn into the winding up.
• If one of the companies becomes insolvent

Legal Requirement and Procedure for the Dissolution of Joint Venture as per Equity:

Strike off the Companies as per Section 248 of the Companies Act:

If the Joint Venture is in the form of Company, then the Companies can dissolve by filing the Form STK-2 with the Registrar of Companies and make the status of the company as Strike off in the register of Company.

Voluntary Winding up of the Company as per the Insolvency and Bankruptcy Code, 2016:

In this the Company can appoint the liquidator for evaluating the assets and settling any outstanding debts and obligations. The final order for the dissolution of the Company will be given by the tribunal.

Strike off the LLP as per the Limited Liability Partnership Act, 2008:

If the Joint venture is in the form of LLP, then LLP can be dissolved by filing the requisite form to the office of Registrar of Companies and marking the status of LLP as Strike off and the same shall be considered as dissolved.