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Contracting with Asset-Less Companies: A Commercial Reality
Asset-light structures may be commercially efficient, but they are legally fragile. With no minimum asset requirement under the Companies Act, 2013, companies across sectors increasingly operate with little or no recoverable assets. When such entities default, insolvency proceedings, though legally available, often fail to deliver meaningful recovery.
Reflecting this reality, the National Company Law Appellate Tribunal ("NCLAT") has observed that initiating a Corporate Insolvency Resolution Process ("CIRP") against an asset-less corporate debtor results in "zero returns with avoidable costs" 1. In practice, such proceedings therefore tend to end either in withdrawal by the creditor or in the early dissolution of the corporate debtor.
The Insolvency and Bankruptcy Code, 2016 ("the Code") empowers the National Company Law Tribunal ("NCLT") to permit withdrawal of a CIRP with the approval of 90% of the committee of creditors2. Courts have consistently exercised this power where the corporate debtor is asset-less.
In Govind Ram Dewangan v. Milano Techno Engineering3 , Hindprakash Tradelink v. Meghna Shree Petrochem4, and Jones Lang v. City Mart5, CIRPs were withdrawn after it became clear that the debtor had no assets or cash reserves.
Similar outcomes have followed across benches, with courts recognising that continuing insolvency proceedings, or pushing such cases into liquidation, serve no purpose when the company has nothing to offer.
Early Dissolution
Regulation 14 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 ("Regulation 14") empowers a liquidator to seek early dissolution of a corporate debtor if it appears that the corporate debtor's realisable assets are insufficient to cover the costs of liquidation, and there is no need for further investigation into its affairs.
Unsurprisingly, companies with little or no assets often find themselves in liquidation after a CIRP fails due to the absence of resolution plans. The liquidation process, in turn, may come to a standstill when the liquidator (or the resolution professional) discovers that the available assets cannot even offset the costs of liquidation. In V. Singhi v. Palavi Dealers6, for example, the Mumbai Bench of the NCLT terminated the corporate debtor's liquidation process after finding that it had no realisable assets. Regulation 14 thus becomes a critical tool, allowing liquidators to cut losses and bring closure by seeking early dissolution.
In Shyson Thomas v. Mr. Madhugiri7, the Chennai Bench of the NCLAT upheld the dissolution of a corporate debtor that had failed to attract any resolution plans during its CIRP due to the absence of saleable assets. Similar rulings have been handed down in Janak Jagjivan v. Committee of Creditors8, Amit Rajani v. Pegasus9, and Choice Wires v. Indicarb10 underscoring the principle that early dissolution is preferable when further proceedings would only lead to a dead end.
The NCLT has echoed this view across benches. In Kamiya & Co. v. Mystic Monk Designs Pvt. Ltd.11, the New Delhi bench of the NCLT ("NCLT Delhi") ordered the corporate debtor's dissolution under Regulation 14 after observing that it was entirely devoid of assets. In GMM Barter v. Value Solar Energy12, NCLT Delhi observed that since the corporate debtor had no assets, dissolution under Regulation 14 would be the only pragmatic course. Likewise, in Purplestream Convergence v. Chitra Perinkulam13, the Chennai bench of the NCLT approved dissolution upon finding that the corporate debtor's assets were "obsolete and not salvageable."
Costs Associated with Initiating and Conducting CIRP
Beyond being largely futile, initiating a CIRP against an asset-less company is also costly. The petitioner must initially fund the Interim Resolution Professional's fees, out-of-pocket expenses, and adviser costs, with reimbursement subject to creditor approval. Once a resolution professional is appointed, the committee of creditors controls ongoing costs. These expenses are far from nominal: the Regulations prescribe minimum monthly fees of INR 1-5 lakhs, apart from performance-linked incentives tied to resolution timelines and value maximisation - costs that quickly outweigh any realistic recovery.
Limited Liability of Directors and Members in Corporate Insolvency
It is well-settled that the assets of a corporate debtor's directors and members lie beyond the reach of the CIRP. The Regulations under the Code ("Regulations") reinforce this position by excluding such assets from the information memorandum. This approach is a natural extension of the doctrine of limited liability which shields individuals from personal exposure for corporate debts. The only crack in this protective wall appears when the NCLT finds that corporate debtor's business was conducted fraudulently. In such cases, NCLT may order directors or members to contribute to the corporate debtor's assets.
However, in practice, this protection for directors and member means that CIRP often struggles against asset-less companies.
Guarantees as a Risk-Mitigation Tool
Given the futility and expensiveness of initiating CIRP against an asset-less company, a practical risk-mitigating measure at the contracting stage is to secure a personal or corporate guarantee for all debts and claims that may arise under the contract.
This is especially effective since several judgments, including those of the Supreme Court of India, have held that a corporate guarantor assumes the status of a corporate debtor upon default by the principal debtor.14 This allows a creditor to initiate CIRP against the surety instead of an asset-less principal debtor. Notably, in Ferro Alloys Corporation Ltd. v. Rural Electrification Corporation Ltd.15, the NCLAT affirmed that a creditor may proceed directly against a guarantor without first initiating proceedings against the principal borrower. Thus, creditors are spared the need to initiate proceedings against a hollow company, as they may instead proceed directly against a more asset-rich guarantor.
Moreover, the moratorium under the Code does not extend to sureties in a contract of guarantee, enabling a creditor to pursue recovery or other proceedings against a guarantor even if CIRP has been initiated against an asset-less company.16
Conclusion
Insolvency proceedings against asset-less companies seldom result in meaningful recovery and can impose disproportionate costs on creditors. In light of this commercial reality, businesses should adopt preventive safeguards at the contracting stage, including securing personal or corporate guarantees, insisting on advance payments or escrow arrangements, incorporating robust termination and suspension rights, and conducting diligence on the counterparty's asset profile and group structure. Such measures help mitigate enforcement risk and ensure that contractual rights are supported by viable recovery mechanisms.
Footnotes
1 Amit Rajani v. Pegasus, Comp. App. (AT) (Ins.) No. 375 of 2023.
2 Section 12 of the Code.
3 C.P. (IB) No. 68/ALD/2021
4 C.P. (IB) 116 of 2020
5 IB-3212(ND)/2019
6 C.P. (IB) 3236 (MB) 2019
7 Company Appeal (AT) (CH) (Ins.) No. 925 of 2020
8 Company Appeal (AT) (Insolvency) No. 1406 of 2024
9 Supra, footnote 1
10 CP(IB) No. 173/BB/2022
11 2022 SCC Online NCLT 11016
12 IA-4855/2023 In (IB) – 280(ND)/2022
13 2025 SCC Online NCLT 1482
14 Laxmi Pat Surana v. Union Bank of India & Anr.,Civil Appeal No. 2734 of 2020.
15 Comp. App. (AT) (Ins.) No. 92 of 2017.
16 Section 14(3)(b) of the Code.
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