The Delhi Bench of the National Company Law Tribunal (NCLT) has held that contractual rights available to financial creditors under Debenture Trust Deeds, including escrow arrangements, reserved matter approvals, inspection and monitoring rights, and oversight over fund utilisation, constitute protective covenants intended to safeguard the lenders’ financial exposure and ensure completion of the financed project. Such commercial safeguards, without evidence of actual management control over the affairs of the Corporate Debtor, cannot attract the statutory disqualification contained in Section 21(2) read with Section 5(24) of the Insolvency and Bankruptcy Code, 2016.
The Tribunal further held that the Applicants failed to establish that Respondent Nos. 3 and 4 exercised such pervasive management or policy control over the Corporate Debtor as would render them related parties within the meaning of Section 5(24) of the Code. The existence of contractual approval rights over specified transactions cannot automatically be equated with control contemplated under Section 5(24). The mere fact that the Security Trustee was the authorised signatory to escrow accounts does not, by itself, establish management or policy control over the Corporate Debtor.
The Coram of Mahendra Khandelwal (Judicial Member) and Atul Chaturvedi (Technical Member) observed that although the powers of the Board of Directors stand suspended upon commencement of CIRP, suspended directors do not cease to be participants in the insolvency process. The constitution of the Committee of Creditors is the very foundation of the CIRP, and any allegation that its composition is contrary to the provisions of the Code cannot be rejected solely on the ground that it has been raised by suspended directors. The Applicants were not seeking to interfere with the commercial wisdom of the CoC but were challenging the very constitution of the CoC on the ground of a statutory embargo under Section 21(2) of the Code.
On the issue of res judicata, the Tribunal held that the challenge in the present proceedings concerns the legality of the constitution of the CoC, which arises only after commencement of CIRP. Such an issue could not have been finally adjudicated before the constitution of the CoC itself, and therefore the present application is not barred by res judicata.
The Tribunal examined the transaction documents in detail and observed that the rights relied upon by the Applicants substantially relate to safeguarding the utilisation of monies advanced by the financial creditors, ensuring completion of the financed project, monitoring project revenues, and preventing diversion of funds. Such stipulations are commonplace in structured project finance transactions, particularly in the real estate sector where lenders routinely insist upon escrow arrangements, monitoring mechanisms, reporting obligations, and approval requirements for specified financial decisions.
The Tribunal further observed that the existence of escrow mechanisms or restrictions upon utilisation of project revenues cannot, by themselves, establish management control over the Corporate Debtor. The transaction documents indicated that day-to-day execution of the project, operation of the Project Operating Account, construction activities, and management of the affairs of the Corporate Debtor continued to remain with the management of the Corporate Debtor. The rights retained by the financial creditors were intended to secure repayment of their financial exposure and ensure proper deployment of the funds advanced by them.
The Tribunal noted that the Applicants had neither produced the amended Articles of Association demonstrating that Respondent Nos. 3 and 4 acquired the right to appoint or remove directors or control the affairs of the Company, nor established that the lenders supplanted the Board of Directors in managing the Corporate Debtor. The WhatsApp communications and cheques relied upon, even if taken at face value, merely indicated monitoring of project implementation and customer collections and did not establish control over management, policy decisions, or corporate governance.
The Tribunal observed that if every lender insisting upon affirmative covenants, reporting obligations, escrow controls, and approval rights were to be treated as exercising management control over the borrower, virtually every secured project finance lender would become disentitled from participating in the Committee of Creditors. Such an interpretation would be wholly inconsistent with the scheme and object of the Code.
Briefly, the Corporate Debtor, Shree Vardhman Buildprop Private Limited, was developing a residential group housing project called “Shree Vardhman Mantra” on approximately 11.262 acres of land at Village Badshahpur, Sector 67, Gurugram. The titleholder of the project land was DSS Infrastructures Private Limited, a wholly owned subsidiary of the Corporate Debtor, which had irrevocably transferred the development rights to the Corporate Debtor.
Kautilya Finance BV (Respondent No. 3) agreed to disburse Rs. 35 crores to the Corporate Debtor for development of the project, pursuant to a Debenture Subscription Agreement dated June 14, 2016, under which 35 seniors, fully secured, redeemable, non-convertible debentures of Rs. 1 crore each were issued. IDBI Trusteeship Services Limited (Respondent No. 1) was appointed as Security Trustee under the Debenture Trust Deed (First DTD). Subsequently, a Second DTD dated Feb 02, 2021 was executed, under which 135 Series B debentures of Rs. 10 lakh each aggregating Rs. 13.5 crores were issued to Kautilya Real Estate Fund (Respondent No. 4).
CIRP was initiated against the Corporate Debtor by order dated April 29, 2024, and Respondent No. 2 (Ducturus Resolution Professional Private Limited) was appointed as the Interim Resolution Professional. The Applicants, being the ex-directors/suspended directors of the Corporate Debtor, filed the present application under Rule 11 of the NCLT Rules, 2016, seeking deletion of Respondent Nos. 3 and 4 from the Committee of Creditors on the ground that they are “related parties” of the Corporate Debtor within the meaning of Section 5(24) of the Insolvency and Bankruptcy Code, 2016.
The Applicants contended that Respondent Nos. 3 and 4 were not mere lenders but had assumed the role of co-promoters, exercising pervasive control over the project through escrow account control, reserved matter approvals, inspection rights, and direct involvement in sales activities including fixation of sale prices, customer interactions, and collection of payments, as evidenced by WhatsApp communications and cheques circulated among their representatives. The Respondents countered that the Applicants, being suspended directors, had no locus standi to challenge the composition of the CoC; that the issue was barred by res judicata as it had been raised at the admission stage and before the NCLAT; that the contractual provisions relied upon were standard lender protection mechanisms in structured finance transactions.
