New Delhi, October 28 — The Supreme Court has held that a lender and debenture holder exercising pervasive control over a corporate debtor's management and projects is a 'related party' under Section 5(24) of the Insolvency and Bankruptcy Code, 2016 (IBC), and cannot be part of its Committee of Creditors (CoC). A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran on Tuesday (October 27) dismissed the appeals of ECL Finance Ltd. and IDBI Trusteeship Services Ltd., upholding their exclusion from the CoC of Palm Developers Private Limited (2026 LiveLaw (SC) 1093).

Source: LiveLaw

"The requirement would not be to the extent of being in the driving seat, but a role of navigation would suffice, in determining policy and channelising business interests," the court observed, holding that participation in a corporate debtor's policy-making — not complete control — is enough to attract the related-party disqualification.

The case arose from a Debenture Trust Deed dated May 13, 2016 and a Facility Agreement dated September 22, 2017. Saha Infratech Private Limited (SIPL) had proposed debentures worth Rs 160 crore, of which Rs 110 crore was subscribed and is now entirely held by ECL, and separately took a Rs 90 crore revolving credit facility from ECL, with Palm Developers as guarantor. After insolvency proceedings began on January 27, 2020, the trustee claimed about Rs 131.17 crore and ECL about Rs 139.02 crore; both were first included in the CoC, a homebuyer challenged their inclusion, and the NCLT and NCLAT held them to be related parties under Section 5(24)(m)(i).

Source: Law Trend

Examining the control ECL held, the court noted that the company's Articles of Association gave the debenture holders and lenders the final say on any deadlock at board or shareholder meetings, the Debenture Trustee could approve or modify the quarterly construction budget, ECL could appoint a nominee director and an observer, its consent was needed to remove key managerial personnel, and it could appoint real estate agents to sell units. Justice Vinod Chandran, writing for the bench, held that ECL had 'all-pervasive control' over the borrower's projects, which could not be called mere restrictive or negative control.

The court also held that ECL's assignment of its rights under the Facility Agreement to the second appellant, made long after the insolvency process began, was not a bona fide transfer but a manoeuvre to defeat the related-party bar, and that the assignee was therefore likewise excluded.

Finding no question of law or perversity in the NCLAT's order, the court dismissed Civil Appeal Nos. 6268 and 6273 of 2022 (ECL Finance Ltd. and Anr. v. Abhinav Mukherjee and Ors.) and closed the connected contempt petitions. The ruling means Palm Developers' insolvency resolution will proceed with a creditors' committee that does not include ECL or the trustee.