Supreme Court: In a batch of appeals concerning the exclusion of a Debenture Trustee and a Debenture Holder/Lender from the Committee of Creditors (CoC) as ‘related parties’ of the Corporate Debtor under the Insolvency and Bankruptcy Code, 2016 (IBC), the Division Bench of J. B. Pardiwala and K. Vinod Chandran*, JJ., upheld their exclusion, holding that participation in the policy-making process under Section 5(24)(m)(i) of the IBC does not require control to the extent of being in the driving seat, and a role of navigation in determining policy and channelising business interests would suffice.
The Court held that the corporate guarantee could constitute a financial debt even without its invocation prior to commencement of CIRP. It further found that the Debenture Holder/Lender exercised all-pervasive control over the projects of the principal borrower and, through the Corporate Debtor’s projects, over its management and business activities. The Court also held that the Debenture Trustee, seeking to protect the interests of the related-party Debenture Holder, was equally disqualified from participating in the CoC. Accordingly, dismissing the appeals, the Court upheld the appellants’ exclusion from the CoC.
Background
The present appeals were filed by the Debenture Trustee and the Debenture Holder/Lender, both of whom were aggrieved by the order passed by the National Company Law Appellate Tribunal (NCLAT), affirming the order of the National Company Law Tribunal (NCLT), the Adjudicating Authority. The NCLT had held that the appellants were ‘related parties’ of the Corporate Debtor (CD) within the meaning of Section 5(24) of the IBC. Consequently, they were held not entitled to be included or participate as financial creditors in the CoC constituted under Section 21 of the IBC.
Analysis
The Court observed that the NCLT had misread the decision in Anuj Jain v. Axis Bank Ltd., (2020) 8 SCC 401, in holding that a corporate guarantee would not constitute a financial debt under Section 5(8) of the IBC merely because the Corporate Debtor was not the principal borrower and no direct disbursal of funds had taken place. The Court clarified that the definition of financial debt expressly includes any liability in respect of a guarantee or indemnity for the items referred to in Section 5(8). It further held that invocation of a corporate guarantee prior to commencement of CIRP is not a prerequisite for a claim to be entertained as a financial debt, relying on China Development Bank v. Doha Bank Q.P.S.C., (2025) 7 SCC 729.
On the question of locus, the Court upheld the right of an individual financial creditor, being a Homebuyer, to challenge the inclusion of the appellants in the CoC as related parties. Relying on Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475, the Court observed that the financial creditors of the CoC are legitimately within their rights to seek exclusion of entities claiming to be financial creditors, on the ground that they are related parties.
The principal question before the Court was whether the appellants were ‘related parties’ of the Corporate Debtor within the meaning of Section 5(24) of the IBC and were consequently liable to be excluded from the CoC under the first proviso to Section 21(2). The Court distinguished the requirement of ‘control’ under Section 29A(c) and (g) of the IBC from the requirement under Section 5(24)(m)(i). Relying on ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1, the Court observed that the former requires de jure or de facto proactive and positive control, whereas Section 5(24)(m)(i) only requires an association with the Corporate Debtor by way of participation in its policy-making process.
“The rigour to find a financial creditor to be a related party under Section 21 read with the second proviso and sub-section (6A)(a), is a tad lesser than that required to find ‘control’ under Section 29A (c) and (g). 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.”
Examining the Debenture Trust Deed, Articles of Association (AoA), Sanction Letter and Facility Agreement, the Court found that ECL, in its capacity as Debenture Holder, had been conferred a proactive role in steering the affairs of the Corporate Debtor and the principal borrower. The contractual provisions enabled ECL to exercise overall supervision over the projects, policy implementation and business activities, including appointment of directors and observers, control over managerial personnel, appointment of technical and financial staff, inspection of business operations and control over project revenues and sale proceeds. The Court held that such powers constituted all-pervasive control and could not be characterised as mere restrictive or negative control. The fact that such control was never actually exercised could not be countenanced, since the policy implementation and business carried out were under the overall supervision of ECL.
The Court further held that since ECL, being the sole Debenture Holder, was a related party of the Corporate Debtor and was consequently disentitled from being represented, participating or voting in the CoC, the Debenture Trustee, ITSL, which sought to protect the interests of ECL, was also disqualified from inclusion in the CoC. Further, ECL could not participate even in its separate capacity as a Term Loan Lender, since the Facility Agreement and AoA also enabled it to exercise overall supervision over the activities of the Borrower and the Guarantor. The Court clarified that had ECL been merely a financial creditor, without falling within the ambit of Section 21(6) or (6A), it would not have been disqualified under the first proviso to Section 21(2).
With regard to the assignment of ECL’s rights under the Facility Agreement to the second appellant, the Court relied on Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475, and the Insolvency Law Committee Report, 2020, to observe that an assignee of a related-party financial creditor may be excluded where the assignment is made in bad faith or with a fraudulent intent to vitiate the proceedings under the IBC. In the present case, the assignment was made after commencement of CIRP and could not be regarded as an assignment made ‘long ago’. Considering the timing of the assignment and the findings of the Forensic Audit Report regarding diversion of funds and fraudulent use of the Corporate Debtor as a vehicle for transferring funds to connected entities, the Court held that the assignment was intended to defeat the rigour of the first proviso to Section 21(2). Accordingly, the second appellant also failed the test of a bona fide assignment and could not participate in the CoC.
Decision
Dismissing the appeals, the Court held that no question of law arose from the NCLAT’s order and found no perversity in its analysis of facts leading to the conclusion that the appellants were related parties under Section 5(24) of the IBC. Consequently, the Court found no valid ground warranting interference with the impugned order.
[ECL Finance Ltd. v. Abhinav Mukherjee, Special Leave Petition (C) No. 14546 of 2023, decided on 27-10-2026]
*Judgment authored by: Justice K. Vinod Chandran
Advocates who appeared in this case:
For the Appellant: Gaurav Mitra, Senior Counsel
For the Respondent: Jayant Mehta & Sri Arijit Prasad, Senior Counsel
