WHAT HAS HAPPENED?
In a significant decision on the categorization of a financial creditor as a related-party creditor of a company/corporate debtor (“CD”), the Supreme Court (“SC”), in ECL Finance Ltd. and Anr. v. Abhinav Mukherjee and Ors.[1], has held that where contractual rights of a financial creditor enable it to participate in the policymaking process of the CD, such financial creditor will be regarded as a ‘related party’ of the CD under Section 5(24)(m)(i) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and will be disqualified from participating and voting in the Committee of Creditors (“CoC”) of the CD under the first proviso to Section 21(2) and 21(6A) of the IBC. The SC clarified that the test of disentitlement does not require ‘positive’ or ‘proactive’ control, as contemplated under Section 29A of the IBC, and a role in navigating the CD’s policy and business interests may suffice.
The matter concerned the corporate insolvency resolution process of Palm Developers Private Limited (“PDPL”), that acted as a guarantor for facilities availed by Saha Infratech Private Limited (“SIPL”) from ECL Finance Limited (“ECL”). While the SC recognized ECL as a financial creditor of PDPL basis the corporate guarantee, it upheld the exclusion of ECL from the CoC of PDPL as a related party of PDPL after examining its financing documents and noting that the controls put in place under the documents enabled ECL to supervise the policy implementation and the business carried out by both SIPL and PDPL.
The SC further held that even the assignee of ECL’s facility cannot participate in the CoC since the assignment fails the test of a “bona fide assignment” in light of the timing of the assignment and certain observations in the forensic audit report with respect to the use of the CD as a vehicle to transfer funds from SIPL to promoter-controlled companies over which ECL has complete charge.
BACKGROUND
● SIPL issued non-convertible debentures to ECL under a Debenture Trust Deed dated 13 May 2016 with IDBI Trusteeship Services Limited (“ITSL”) as the debenture trustee. The CD furnished an unconditional and irrevocable corporate guarantee to ECL, alongside project security.
● Parallelly, ECL extended a revolving credit facility to SIPL under a Facility Agreement dated 22 September 2017. The CD was a guarantor and security provider.
● CIRP commenced against the CD on 27 January 2020. The guarantee had not been invoked prior to the CIRP. ITSL lodged the debenture-related claim and ECL lodged the facility claim. Both were initially included in the CoC.
● An individual homebuyer/creditor challenged their inclusion before the NCLT. The said application was allowed on, inter alia, two grounds: that ECL/ITSL are not financial creditors on account of the absence of direct disbursement to the CD and that they are related parties to the CD.
● An appeal was filed against the NCLT order and the exclusion of ECL/ITSL was sustained by the National Company Law Appellate Tribunal (“NCLAT”). NCLAT also held that since the guarantee was not invoked, the claims of these financial creditors could not have been entertained.
● An appeal was filed against the order before the SC. While holding ECL to be a financial creditor, it upheld its exclusion from the CoC as a related party of the CD.
KEY OBSERVATIONS AND FINDINGS OF SC
| Financial debt does not depend on direct disbursement to the guarantor | SC noted that Section 5(8) of the IBC includes liability under guarantees or indemnities for the transactions specified in clauses (a) to (h). The fact that the CD was a guarantor rather than the principal borrower did not, by itself, negate financial debt. Relying on China Development Bank v. Doha Bank Q.P.S.C.[2], the SC also held that default for initiating CIRP under Section 7 is distinct from the existence of financial debt and financial-creditor status for submission of a claim in an existing CIRP. It rejected the NCLAT’s finding that a creditor cannot qualify as a financial creditor unless the corporate guarantee was invoked before the commencement of CIRP. |
| Policymaking participation is a lower threshold than Section 29A control | The SC distinguished Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta[3], which addressed positive, proactive control for a resolution applicant’s disqualification under Section 29A(c) and (g). The SC held that unlike Section 29A, Section 5(24)(m)(i) only requires association through participation in the CD’s policymaking processes. The SC held that the rigor to find a financial creditor to be a related party under Section 21 is a ‘tad lesser’ than that required to find control under Section 29A. A lender need not occupy the driving seat; a navigational role in determining policy and channelizing business interests can suffice. |
| The cumulative contractual architecture mattered | The SC reviewed the AoA of the CD and various financing documents (Debenture Trust Deed, Sanction Letter, Facility Agreement) to determine the rights held by ECL. Basis the review, the SC noted following rights available to ECL, which, according to the SC, clearly confers a proactive role on ECL in steering the Company, rather than merely restrictive or negative control: – Right to appoint a Director on the Board/ Committees as nominee Director, the right to appoint an Observer on the Board. – Requirement of Lender consent for removal of any managerial personnel. – Right to require appointment and change of technical, financial and executive staff in key posts in case of failure to adhere to the business plan and meet Project milestones. – Right to appoint technical, management consultants to inspect and examine the working of the CD, right to conduct examination of the financial or Cost Accounting Systems. – Right to have a final, binding say on board or shareholder deadlocks. – Right to approve/revise quarterly construction budgets and linked escrow releases to the approved budget. – Power to appoint Agents on behalf of the CD for sale of specific units/ inventory and right to construct, take approvals, sell etc. under a power of attorney. – Right to approve Quarterly Construction Budget and advise on modifications/revisions of the Budget. – Control of Project revenues including the payments made by the allotees of the CD. Significantly, the SC rejected the argument that ECL had never exercised control, noting that ECL oversaw policy implementation and the business as a whole. |
| Trustee and holder are distinct, but representation cannot cure ineligibility | ITSL acted as trustee, representing the debenture holder in relation to the debenture claim. The SC held that 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. |
| Assignment is not an automatic route back into the CoC | Referring to Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475, the SC recognized the distinction between legitimate debt transfers and arrangements intended to defeat related party exclusion. It emphasized that the resolution professional should verify if assignee is a related party to CD and where it may be proved that a related party had assigned or transferred its debt to a third party in bad faith or with a fraudulent intent, the assignee should be treated akin to a related party financial creditor. SC noted that in the present case the assignment occurred well after CIRP began. It also noted the forensic audit report which stated that: (a) the CD was fraudulently used as a vehicle to transfer funds from SIPL to two other promoter controlled entities and over which ECL has complete charge of their assets; (b) the Project for which loan was given was initiated fraudulently, without any intention to complete it, to defraud the Homebuyers and to mortgage it for availing loan facilities from financial creditors, which funds would be diverted to other connected entities. |
| An individual homebuyer may challenge CoC inclusion | Lastly, the SC upheld the individual homebuyer’s locus to object to inclusion of related parties. The class authorized representative’s role in CoC meetings and voting did not extinguish the homebuyer’s ability to seek adjudication. |
PRACTICAL IMPLICATIONS
For lenders:
Most financing documents contain provisions for protection of creditors, including a right to appoint a nominee director and mandatory consent/affirmative rights on specific items. Specifically in the context of project finance and real estate lending, the protection also extends to supervision over utilization of money, control of escrow accounts and the ability to step in, operate and collect revenues.
So far, these provisions have been viewed as measures put in by a prudent lender to ensure repayment and to protect the debtor’s assets and business and have not resulted in the lender being treated as a ‘related party’ of the debtor.
The ECL judgment is likely to have far-reaching consequences on how such credit protection clauses are interpreted and built into financing documents in future. This is especially relevant for structured debt transactions, project finance and real estate financing, which require additional protection, given the nature of financing and risk involved.
What is relevant is that even if the financial creditor is not acting in concert with the promoters, and even if the control has not actually been exercised by the financial creditor, the clauses that are meant to protect the financial creditors may result in their exclusion from the CoC (thereby denying protection to the creditors when it is needed the most).
Hence, going forward, lenders should review the financing documents as an integrated package, including articles of association, sanction letters, trust deeds, facility agreements and powers of attorney, to ensure that the lender is not considered as having rights to participate in the policymaking process of the debtor. Operational control over the obligors, including final decision-making on deadlocks, consent rights over business plans or budget approvals, management intervention and project execution powers, warrants particular scrutiny. The commercial utility of such rights must be weighed against the potential loss of CoC participation, discrimination in distribution of payouts under the resolution plan as compared to unrelated financial creditors. Labels such as “protective covenant” are not conclusive.
For assignees:
The ECL judgment holds assignment of debt by ECL to be non-genuine on the basis of timing as well as the observations in the forensic report. What is interesting is that the observations in an unadjudicated forensic report around use of the CD as a vehicle to divert funds to entities where ECL had a charge was considered relevant by the Court to determine the genuineness of the assignment by ECL, even though there does not seem to be any evidence of the assignment itself being fraudulent.
The assignees that purchase loans from other financial entities like banks, NBFCs, alternate investment funds after admission of the CIRP are now likely to exercise additional diligence while undertaking such assignment including on status of assignor as the related party of the debtor and if there are any adverse observations on the loan.
For resolution professionals:
Resolution professionals have typically relied on the independent status of regulated financial creditors (such as banks, financial institutions and alternate credit funds) to determine their related party status. The ECL judgment will now result in greater scrutiny of the financing documents and articles of the debtor by the resolution professional to determine if the rights granted under these documents allow lenders to supervise or participate in policymaking. The assignment of debt by related parties, especially post-CIRP, also warrants greater scrutiny into the timing and commercial rationale of the assignment. Equally, exclusion from the CoC should not be conflated by the resolution professional with the non-existence of the underlying financial debt.
*Pooja Mahajan, Partner, Head of Insolvency and Restructuring
**Nishant Sogani, Partner, Banking and Finance and Insolvency and Restructuring
***Savar Mahajan, Counsel, Insolvency and Restructuring
****Srivatsav Reddy Beerapalli, Associate, Insolvency and Restructuring
[1] 2026 INSC 1159
[2] (2025) 7 SCC 729
[3] (2019) 2 SCC 1