Financial Creditor’s Role In Navigating Corporate Debtor’s Policy Suffices For Related-Party Status, Barring CoC Participation Under IBC: Supreme Court

The Court was hearing appeals by ECL Finance Limited, a debenture holder and lender, and IDBI Trusteeship Services Limited, the debenture trustee, challenging an NCLAT order affirming their exclusion from the CoC of Palm Developers Private Limited as related parties.

A Bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran observed: “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.”

The Bench further held: “If the ECL is found to be a related party, as coming forth from Section 24(5)(m)(i), then it cannot participate in the proceedings of the CoC, nor can it be included. If the ECL cannot be included as a Debenture Holder, since admittedly the entire debentures are held by the ECL, the Debenture Trustee who seeks to secure the interest of the Debenture Holder also cannot participate in the CoC, nor can it be included.”

Senior Advocate Gaurav Mitra appeared for the appellants. Senior Advocates Jayant Mehta and Arijit Prasad appeared for the respondents.

Background

The claims arose from a debenture trust deed executed in 2016 and a facility agreement executed in 2017. Saha Infratech Private Limited issued non-convertible debentures, of which ₹110 crore was subscribed and ultimately held entirely by ECL. It subsequently obtained a revolving credit facility of up to ₹90 crore from ECL.

Palm Developers acted as corporate guarantor for both transactions. The securities included mortgages over project properties, hypothecation of receivables, escrow arrangements and corporate guarantees.

After the CIRP against Palm Developers commenced, the debenture trustee submitted a claim of approximately ₹131.17 crore, while ECL claimed approximately ₹139.02 crore under the facility agreement. Both were initially included in the CoC, but a homebuyer challenged their inclusion.

The NCLT held that both entities were related parties under Section 5(24)(m)(i). The NCLAT affirmed their exclusion, prompting the appeals before the Supreme Court.

Court’s Observations

Policy Participation Requires Less Than Positive Control

The Court distinguished the related-party inquiry under Sections 5(24) and 21 from the positive-control test governing disqualification under Section 29A(c) and Section 29A(g).

Referring to ArcelorMittal India Private Limited v. Satish Kumar Gupta (2019), the Court observed that Section 29A required proactive or positive control over management or policy decisions. Section 5(24)(m)(i), however, required an association with the corporate debtor through participation in its policy-making processes.

The Bench explained: “We must immediately notice that a reading of Section 5(24) with the first proviso of sub-section (2) and sub-section (6A) of Section 21, does not indicate a requirement of a proactive control as would the rigour of the word ‘control’ in Section 29A (c) & (g) would bring forth. Sub-section (24) of Section 5, by sub-clause (m)(i), only requires an association with the CD by way of participation in policy making process of the CD. First proviso to Section 21, as extracted hereinabove, restricts a financial creditor or an AR of a financial creditor, inter alia referred to in sub-section (6A), if it is a related party of the CD, from the right of representation, participation or voting in a meeting of the CoC.”

Contractual Rights Gave ECL An All-Pervasive Role

The Court examined the articles of association, debenture trust deed, facility agreement and sanction letter. It observed that these documents provided for participation in business-plan and construction-budget approvals, appointment of nominee directors, intervention in managerial appointments and inspection of operations and accounts.

The Court further noted that ECL possessed rights concerning project construction, statutory approvals, appointment of real-estate agents, sales, communications with purchasers and control of project revenues through escrow accounts.

The Bench held: “From the above, it is crystal clear that ECL has an all-pervasive control, insofar as the projects of the principal Borrower are concerned, for facilitating which the debentures were issued and the Term Loan Facility extended. The AoA of the CD, a Guarantor, also indicated such control being exercised by the debenture holder/lender on its management and it cannot be said to be a mere restrictive or negative control exercised. That the said control was never put in place, cannot at all be countenanced, since the policy implementation and the business carried out, were under the overall supervision of ECL, both as a Debenture Holder, the powers being exercised by the Debenture Trustee, the ITSL, and as a Term Loan Lender.”

The Court consequently found that ECL’s contractual role was not confined to protecting its investment through negative covenants. Its rights extended to overall supervision of policy implementation and the project-development business.

Related-Party Disability Extended To Debenture Trustee

The Court held that ECL’s related-party status as the sole debenture holder barred its representation, participation and voting in the CoC. Its separate status as a lender could not overcome the disability resulting from its role as the related-party debenture holder.

The Bench stated: “However, ECL having the status of the Debenture Holder is disabled from being represented, participating and voting in the CoC as the Debenture Holder due to the explicit terms in the Debenture Trust Deed and by reason of that, disabled even in the status of a lender. The pervasive control conferred on the sole Debenture Holder also disables the Debenture Trustee, the ITSL, who is protecting the interest of the Debenture Holder, from being included in the CoC.”

The Court also held that ECL’s subsequent assignment of its rights under the facility agreement did not remove the disability. Since the assignment occurred long after the CIRP commenced, the Court found that it was intended to overcome the bar under Section 21(2) and failed the test of a bona fide assignment.

On the connected issues, the Court held that a corporate guarantee could constitute financial debt even when it had not been invoked before the commencement of CIRP. It also affirmed the locus of an individual homebuyer to challenge the inclusion of alleged related parties without acting through the authorised representative of the homebuyers as a class.

Conclusion

The Supreme Court found no question of law or perversity in the NCLAT’s conclusion that the appellants were related parties under Section 5(24) of the IBC.

The Court dismissed the appeals, closed the contempt petitions and rejected all pending applications, including the intervention and impleadment applications.

Cause Title: ECL Finance Limited and Another v. Abhinav Mukherjee and Others (Neutral Citation: 2026 INSC 1159)

Appearances

Appellants: Senior Advocate Gaurav Mitra; Advocates Atul Sharma and Aditya Vashith; Advocate-on-Record Abhishek Agarwal

Respondents: Senior Advocates Jayant Mehta and Arijit Prasad; Advocates Raghavendra Mohan Bajaj, Kumar Karan, Pankaj Pandey, Girish Tripathi, Digvijay Prasad, Ankita Singh, Deepak Kumar, Ashish Yadav, Shreya Kasera, Arjun Aggarwal, Mahima Pandey, Jahnavi Verma, Sahil Sethi, Samriddh Bindal, Vikash Kumar, Devika Tiwari, Ashutosh Chaturvedi and Rohini Srinivasan; Advocates-on-Record Garima Bajaj, Soumik Ghosal, Abhishek Agarwal, Megha Karnwal, Sahil Tagotra, Alabhya Dhamija and Swikriti Singhania

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