The Supreme Court of India has delivered a landmark ruling affirming that financial creditors who exercise significant policy-making influence over a corporate debtor are to be classified as "related parties," effectively barring them from participating in or voting within the Committee of Creditors (CoC). In a judgment dismissing appeals filed by ECL Finance Ltd. and IDBI Trusteeship Services Ltd. (ITSL), the bench of Justice J. B. Pardiwala and Justice K. Vinod Chandran clarified that the threshold for proving such a connection under the Insolvency and Bankruptcy Code (IBC), 2016, is distinct from and less rigorous than the requirement for "control" under Section 29A of the statute.

The dispute originated from the insolvency proceedings of Palm Developers Private Limited, which acted as a corporate guarantor for debentures and term loan facilities issued to Saha Infratech Private Limited. Following the commencement of the Corporate Insolvency Resolution Process (CIRP) in January 2020, both ECL Finance and ITSL asserted their status as financial creditors, claiming substantial amounts exceeding ₹130 crore each. Their inclusion in the CoC was contested by a homebuyer, who alleged that the lenders, through complex contractual arrangements, held pervasive control over the corporate debtor’s affairs, thereby qualifying them as related parties under Section 5(24)(m)(i) of the IBC.

The Supreme Court examined various transactional documents, including the Debenture Trust Deed and the Facility Agreement, which revealed that the lenders possessed wide-ranging powers. These included the authority to appoint nominee directors to the board, the power to override board decisions in the event of a deadlock, and the capability to approve or modify quarterly construction budgets. These arrangements allowed the lenders to play a proactive role in directing the business and operational trajectory of both the primary borrower and the corporate guarantor.

In explaining the legal threshold for disqualification, the Court distinguished this scenario from the more stringent "proactive control" requirements found in Section 29A regarding resolution applicants . Justice K. Vinod Chandran, writing for the bench, observed: "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 emphasized that the legislative intent behind Section 5(24) was to ensure that parties with internal influence do not undermine the independence of the CoC. The court further clarified: "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."

The Court rejected the appellants' argument that the mere existence of these powers in the contract did not equate to their actual exercise. The bench held that because the corporate debtor’s policy implementation was under the overall supervision of ECL Finance, the potential for influence rendered the relationship sufficiently close to mandate exclusion. The ruling noted that if a lender has the standing to override corporate decisions and manage project milestones, that power alone is enough to categorize the entity as a related party for the purpose of the Committee of Creditors, regardless of whether that power was fully utilized in every instance.

Furthermore, the Supreme Court scrutinized the assignment of the facility agreement rights from ECL Finance to another entity. The Court found that this transfer occurred long after the insolvency process had been initiated and was not a bona fide commercial transaction. Instead, the bench observed that the assignment appeared to be a strategic move designed to bypass the statutory restriction on related party participation. This finding was bolstered by a forensic audit report mentioned during the proceedings, which indicated that the corporate guarantor had been utilized as a conduit to divert funds to related entities under the control of the promoters, with the lenders exercising direct supervision over the assets involved.

The Court’s decision effectively closes the door on attempts by major lenders to maintain voting dominance in insolvency proceedings while simultaneously holding a "controlling" position over the debtor's business operations. By setting a clearer standard for what constitutes participation in "policy making," the Supreme Court has provided necessary guidance to resolution professionals and adjudicating authorities regarding the composition of the CoC.

The ruling emphasizes that the integrity of the insolvency resolution process depends on the impartiality of the Committee of Creditors. When a financial creditor is so deeply entwined with the management and policy-making of the corporate debtor, their presence in the CoC creates a conflict of interest that the IBC specifically seeks to mitigate. The Court’s rejection of the appeals ensures that the principle of arm's-length negotiation is preserved within the framework of the Code, preventing lenders from leveraging their supervisory powers to steer insolvency outcomes in their favor.

Following the dismissal of these appeals, the National Company Law Appellate Tribunal’s earlier decision, which had affirmed the National Company Law Tribunal’s findings, remains fully in effect. The related contempt petitions associated with the case were also ordered to be closed by the bench. The corporate debtor will now proceed with its insolvency resolution process without the participation of the appellants in the Committee of Creditors, ensuring that the voting process is conducted by independent financial creditors as mandated by the statutory scheme of the IBC. This outcome serves as a definitive precedent for future cases involving complex financing agreements that grant lenders extensive oversight or management rights over corporate borrowers or guarantors.