The Supreme Court on Tuesday (October 27) held that a lender and debenture holder exercising pervasive influence over a corporate debtor's management and policy decisions can be treated as a related party under the Insolvency and Bankruptcy Code, 2016 (IBC) and excluded from participating in the Committee of Creditors (CoC).

“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.”, observed a bench of Justice JB Pardiwala and Justice K. Vinod Chandran, while dismissing the appeal filed by a debenture holder for inclusion in the CoC, after finding that it to be a related party under Section 24(5)(m)(i) of the IBC, having an all-pervasive control over the policy decision-making of the corporate debtor.

“We are, hence, only looking at whether the association with the CD by the ECL, in its status as a Debenture Holder; which alone we would as of now consider, brings in a participation in policy making of the Corporate Debtor…”, the Court said, while justifying Appellant's exclusion from the CoC.

The case arose from financing arrangements involving Saha Infratech Private Limited (SIPL), which had issued non-convertible debentures and availed a revolving credit facility from ECL Finance. Palm Developers Private Limited acted as a corporate guarantor for the obligations arising from these arrangements.

IDBI Trusteeship Services Limited (ITSL) was appointed as the debenture trustee, while ECL Finance held the debentures and also acted as the lender under a separate facility agreement.

Following the commencement of the corporate insolvency resolution process (CIRP) against Palm Developers in January 2020, ITSL submitted a claim of approximately ₹131.17 crore in its capacity as debenture trustee. ECL Finance separately claimed approximately ₹139.02 crore under the term loan facility.

Initially, both entities were treated as financial creditors and included in the CoC. However, a homebuyer challenged their inclusion, contending that they were related parties of the corporate debtor and therefore ineligible to participate in the CoC.

The NCLT accepted the objection, finding that the appellants were related parties under Section 5(24)(m)(i) of the IBC. The NCLAT upheld that decision, prompting the appeals before the Supreme Court.

Affirming the NCLAT's decision, the judgment authored by Justice Chandran observed that Section 5(24)(m)(i) merely requires an association with the corporate debtor through participation in its policy-making process. Accordingly, the influence need not amount to complete control over the company as required under Section 29A of the Code.

The Court held that a creditor's role in navigating the corporate debtor's policy decisions and channelising its business interests can be sufficient to establish a related-party relationship.

“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 by the Debenture Trustee, the ITSL, and as a Term Loan Lender. 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.”, the Court observed.

As a result, the appeal was dismissed.

Appearance:

For Appellant(s) : Mr. Gaurav Mitra, Sr. Adv. Mr. Abhishek Agarwal, AOR Mr. Atul Sharma, Adv. Mr. Aditya Vashith, Adv. Mr. Anmol Bansal, Adv.

For Respondent(s) : Mr Jayat Mehta, Sr. Adv. Mr. Om S., Adv. Mr. Arijit Prasad, Sr. Adv. Mr. Raghvendra Mohan Bajaj, Adv. Ms. Garima Bajaj, AOR Mr. Kumar Karan, Adv. Mr. Soumik Ghosal, AOR Mr. Abhishek Agarwal, AOR Ms. Megha Karnwal, AOR Mr. Pankaj Pandey, Adv. Mr. Sahil Tagotra, AOR Mr. Girish Tripathi, Adv. Mr. Digvijay Prasad, Adv. Ms. Ankita Singh, Adv. Mr. Deepak Kumar, Adv. Mr. Ashish Yadav, Adv. Ms. Shreya Kasera, Adv. Mr. Aditya Kumar, Adv. Ms. Riju Phukan, Adv. Mr. Vibhal J., Adv. Mr. Sahil Sethi, Adv. Mr. Samriddh Bindal, Adv. Mr. Vikash Kumar, Adv. Ms. Devika Tiwari, Adv. Ms. Swikriti Singhania, AOR Mr. Arjun Aggarwal, Adv. Mr. Alabhya Dhamija, AOR Mr. Surya Pratap Tyagi, Adv. Ms. Mahima Pandey, Adv. Mr. Mohd Umar Iqbal Khan, Adv. Mr. Karrtik Sharma, Adv. Ms. Megha Karnwal, AOR