A Skeleton in the Closet: Unmasking the ‘Unclean Hands’ and the Myth of Deadlock for Corporate Survival

Introduction

The sanctity of a corporate entity’s life is a principle heavily guarded by the judiciary, reserved for dissolution only when the very purpose of its existence has evaporated or its internal gears have jammed beyond repair. In general, corporate law increasingly treats winding up as a remedy of “last resort,” emphasizing the preservation of the corporate veil and the resolution of internal disputes through specific statutory mechanisms rather than the “nuclear option” of liquidation. The core issue before the court was whether the alleged mismanagement, loss of substratum following the termination of a distribution agreement, and shareholder deadlock justified the permanent closure of a company that still possessed significant assets and a functional majority.

This approach was central to the case of Mr. Gurinder Mohan Singh Nindrajog v. Hover Automotive India Private Limited¹, adjudicated by the National Company Law Tribunal (NCLT), Mumbai Bench – I. The Bench, comprising Shri Prabhat Kumar (Technical Member) and Shri Sushil Mahadeorao Kochey (Judicial Member), primarily held that a petition for winding up on “just and equitable” grounds is not maintainable when the petitioner has suppressed material facts and when efficacious alternative remedies, such as arbitration or proceedings for oppression and mismanagement, remain available.

The factual matrix involves a joint venture between the Petitioner (a 27% minority shareholder) and the Majority Shareholders (73%) to handle a central third-party entity that served as the primary business partner for the joint venture for automobile distribution in India. Following the termination of the Exclusive Distribution Agreement by the central third party and subsequent legal battles, the Petitioner alleged that the company’s substratum had collapsed. Relations soured further over disputed share allotments, allegations of siphoned arbitration awards, and the exclusion of the Petitioner from management.

The Doctrine of Last Resort: Balancing Shareholder Discord against Corporate Survival

The Petitioner contended that the company had become a “skeleton” of its former self after losing the third party contract, alleging that the Majority Directors were siphoning funds from a substantial SIAC² arbitration award and failing to hold statutory meetings. It was further argued that the relationship was akin to a partnership that had suffered an irreparable breakdown of trust, necessitating winding up under Section 271(e) of the Companies Act³. Conversely, the Respondent argued that the petition was a retaliatory measure filed with “unclean hands,” noting that the Petitioner had suppressed the fact that he previously filed and withdrew an insolvency application under the IBC⁴. The Respondent further asserted that the company’s objects were broad enough to pursue other businesses and that the SHA⁵ mandated arbitration for such disputes.

In analyzing the legal precedents, the Tribunal relied on several landmark judgments to define the boundaries of “just and equitable” winding up. In S.P. Chengalvaraya v. Jagannath⁶ The court emphasized that a person whose case is based on falsehood or who withholds vital documents to gain an advantage has no right to approach the court and can be summarily thrown out. The Supreme Court in the case of  Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwalla⁷ affirmed that if an alternative remedy is available, the court may refuse winding up if the petitioner is acting unreasonably by not pursuing that alternative. Daulat Makanmal Luthria v. Solitaire Hotels Pvt. Ltd⁸. further reinforces the principle that winding up is a “healing” measure of last resort, only to be used when all other means of saving the company are exhausted.

The Tribunal removed the dichotomy between the Petitioner’s claims of a “deadlocked partnership” and the Respondent’s claims of a “functional majority” by scrutinizing the company’s governing documents. The Bench observed that the Company’s Memorandum of Association was broadly worded and not limited solely to Nissan-related business, thus the loss of one contract did not equate to a total loss of substratum. 

Furthermore, the Tribunal found that the Petitioner’s failure to disclose the prior IBC proceedings was “fatal” to the petition, as it proved a lack of transparency. Winding up is a ‘healing’ measure of last resort, to be invoked only when the corporate substratum has truly vanished and all alternative remedies are exhausted. Since the Majority Shareholders held 73% of the equity, the Tribunal ruled there was no legal “deadlock” as the majority was still capable of making decisions. Consequently, the Tribunal dismissed the petition, directing the parties toward arbitration and Section 241 and 242 remedies. 

Conclusion

The case of Gurinder Mohan Singh Nindrajog (Supra) serves as a stern reminder that the NCLT will not allow “just and equitable” grounds to be used as a shortcut for disgruntled shareholders to bypass established dispute resolution mechanisms. The Tribunal reaffirmed that as long as a company is not commercially insolvent and possesses tangible assets such as the arbitral award in this case, internal discord alone is insufficient to warrant its death.

The future ramifications of this judgment are significant for minority shareholders and joint venture partners. It reinforces the “clean hands” doctrine in company law, signaling that the suppression of prior litigation will lead to a summary dismissal of equitable claims. It also strengthens the sanctity of Arbitration Clauses within Shareholders’ Agreements, making it harder for parties to drag internal management disputes into the winding-up jurisdiction of the NCLT when a private forum has been agreed upon.

In the future, legal experts may ask: Can a minority shareholder ever successfully argue loss of substratum if the ‘Main Objects’ clause of a company is drafted with extreme breadth? Additionally, how will the NCLT balance the ‘last resort’ nature of winding up with cases where a majority is clearly acting in a way that renders alternative remedies (like arbitration) functionally toothless due to a lack of local assets? It is suggested that companies draft more specific “event of default” or “exit” clauses in their SHAs to define exactly when a business purpose is deemed “failed,” rather than relying on the broad and often unpredictable “just and equitable” standard of the Tribunal.

Citations

1. Mr. Gurinder Mohan Singh Nindrajog v. Hover Automotive India Private Limited C.P./213 (MB) 2017
2. Singapore International Arbitration Centre
3. Companies Act, 2013
4. Insolvency and Bankruptcy Code, 2016
5. Shareholders’ Agreement
6. S.P. Chengalvaraya Vs. Jagannath and Ors (1994) 1 SCC 1
7. Hind Overseas (P) Ltd. Vs. Raghunath Prasad Jhunjhunwalla (1976) 3 SCC 259
8. Daulat Makanmal Luthria Vs. Solitaire Hotels Pvt. Ltd. 1991 SCC OnLine Bom 557

Expositor(s): Adv. Shreya Mishra