On October 27, 2026, the Court passed the order in Civil Appeal No. 6268 of 2022, settling a crucial dispute regarding the Insolvency and Bankruptcy Code. The judgment provides absolute clarity on the definition of a related party and their subsequent exclusion from the Committee of Creditors. The case involved ECL Finance Limited acting as a lender and debenture holder, along with IDBI Trusteeship Services Limited acting as a debenture trustee. They appealed against a lower tribunal order that excluded them from the Committee of Creditors of Palm Developers Private Limited, the corporate debtor.
The corporate debtor had acted as a corporate guarantor for Saha Infratech Private Limited, which had issued non convertible debentures and availed a term loan facility from the appellants. When the corporate insolvency resolution process commenced, the appellants filed massive claims based on the corporate guarantee. A homebuyer, acting as a financial creditor, objected to their inclusion in the Committee of Creditors on the grounds that they were related parties.
Initially, the National Company Law Tribunal ruled that the claims did not qualify as a financial debt because the corporate guarantee had not been invoked before the insolvency process began. The Court passed the order correcting this legal interpretation. Citing previous jurisprudence, the Court clarified that a corporate guarantee constitutes a financial debt under the Insolvency and Bankruptcy Code even if a default or invocation has not occurred prior to the commencement of the corporate insolvency resolution process.
Despite acknowledging the appellants as financial creditors, the Court upheld their exclusion from the Committee of Creditors because of their related party status. Under Section 5(24)(m)(i) of the Insolvency and Bankruptcy Code, any entity that participates in the policy making processes of a corporate debtor is considered a related party. The Court examined the facility agreements and articles of association, finding that the appellants held pervasive and proactive control over the corporate debtor. This control included the power to appoint nominee directors, resolve board deadlocks, manage construction budgets, and directly supervise project revenues. The Court noted that this level of supervision over business interests and policy implementation went far beyond standard negative control, firmly placing the appellants in the category of a related party.
Furthermore, the Court addressed a strategic assignment of debt by ECL Finance Limited to a third party after the corporate insolvency resolution process had already commenced. The Court passed the order invalidating this assignment for the purposes of joining the Committee of Creditors. A forensic audit revealed that the corporate debtor was used fraudulently to siphon funds to other entities controlled by the promoters. The Court ruled that the recent assignment was not made in good faith but was a calculated manoeuvre to bypass the statutory restrictions of Section 21(2) of the Insolvency and Bankruptcy Code.
Ultimately, the Court dismissed the appeals and affirmed the decisions of the lower tribunals. By keeping the appellants out of the Committee of Creditors, the judgment reinforces the statutory safeguards designed to prevent related parties from improperly influencing the corporate insolvency resolution process.