Lender’s Sweeping Project And Board Control: Supreme Court Upholds Its Exclusion From Debtor’s Creditors’ Committee

Saha Infratech Pvt. Ltd. (SIPL) issued debentures subscribed entirely by ECL Finance Ltd. (ECL) and obtained a term-loan facility from ECL.

Palm Developers Pvt. Ltd. (the corporate debtor) guaranteed SIPL’s obligations under both arrangements and provided security.

After CIRP was commenced against the corporate debtor, IDBI Trusteeship Services Ltd. (ITSL), as debenture trustee, and ECL submitted claims and were included in the Committee of Creditors (CoC).

A homebuyer objected to their inclusion. The NCLT found that the claims were not financial debt of the corporate debtor and that the appellants were related parties; the NCLAT upheld their exclusion from the CoC. The appellants challenged that decision.

Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC), includes liability under a guarantee within financial debt; a guarantee need not have been invoked before CIRP for the underlying debt to qualify, and “default” is relevant to initiating CIRP under Section 7, not to whether a financial debt exists.

Under Section 5(7), a person to whom financial debt is owed may be a financial creditor even absent default.

Section 5(24)(m)(i) treats a person associated with the corporate debtor through participation in its policy-making process as a related party; under the first proviso to Section 21(2), a related-party financial creditor covered by Section 21(6A) cannot represent, participate or vote in the CoC.

Unlike the “control” test considered under Section 29A in *ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta*, (2019) 2 SCC 1, the Section 5(24)(m)(i) inquiry does not require proof that the creditor is in the “driving seat”; a role in navigating policy and channelising business interests may suffice.

Under *Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd.*, (2021) 3 SCC 475, a recent assignment intended to evade the related-party exclusion does not enable the assignee to participate in the CoC.

The Court rejected the view that the guarantee-based claims could not be considered because the guarantee had not been invoked before CIRP.

It also upheld the homebuyer’s locus to challenge the appellants’ inclusion, noting that an authorised representative’s role for a class of creditors did not prevent an individual homebuyer from participating in the adjudication.

On related-party status, the Court found that the debenture documents and the corporate debtor’s Articles of Association gave ECL, directly or through the trustee, significant influence over project budgets, board deadlocks, managerial appointments, business plans, project sales and revenues.

This amounted to participation in policy-making under Section 5(24)(m)(i), even though the test was less demanding than positive control under Section 29A.

Because ECL was the sole debenture holder and its related-party status disqualified it from CoC participation, ITSL, acting to protect ECL’s interest, was also excluded.

The assignment of ECL’s facility-agreement rights occurred after CIRP began and was not bona fide for CoC-participation purposes; the assignee could not avoid the exclusion.

It found no question of law or perversity warranting interference, dismissed both appeals, closed the contempt petitions and rejected any pending applications.