Lenders Exercising Policy Influence Over Corporate Debtor Are Related Parties, Ineligible for CoC: SC

New Delhi, Oct 29 (KNN) The Supreme Court has held that lenders and debenture holders exercising pervasive influence over a corporate debtor's management and policy decisions can be treated as related parties under the Insolvency and Bankruptcy Code (IBC), 2016, and excluded from participating in the Committee of Creditors (CoC).

A bench of Justices JB Pardiwala and K Vinod Chandran dismissed an appeal by a debenture holder seeking inclusion in the CoC, holding that its influence over the corporate debtor's policy-making brought it within the scope of Section 5(24)(m)(i) of the Code.

The Court observed that the requirement was not to be in the driving seat; a navigational role in determining policy and channelising business interests would suffice.

Dispute Over Financial Creditors' CoC Membership

The case arose from financing arrangements involving Saha Infratech Private Limited (SIPL), which had issued non-convertible debentures and obtained a revolving credit facility from ECL Finance. Palm Developers Private Limited acted as corporate guarantor.

IDBI Trusteeship Services Limited (ITSL) was appointed debenture trustee, while ECL Finance held the debentures and separately provided a term loan.

After insolvency proceedings against Palm Developers began in January 2020, ITSL filed a claim of around Rs 131.17 crore as debenture trustee, while ECL Finance claimed around Rs 139.02 crore under the loan facility.

Both were initially admitted as financial creditors to the CoC. However, a homebuyer challenged their inclusion, arguing that they were related parties and therefore ineligible to participate.

The NCLT accepted the objection under Section 5(24)(m)(i) of the IBC, and the NCLAT upheld the decision, leading to the appeals before the Supreme Court.

Policy Influence Sufficient to Establish Related-Party Status

Upholding the NCLAT ruling, the Supreme Court said the provision requires an association with the corporate debtor through participation in its policy-making process. Such influence need not amount to complete control over the company, as contemplated under Section 29A of the Code.

The Court found that ECL Finance exercised pervasive control over the projects of the principal borrower and that the corporate guarantor's Articles of Association also reflected the lender's influence over its management.

It rejected the argument that the control was merely restrictive or negative, noting that policy implementation and business operations remained under ECL's overall supervision.

The bench held that since ECL Finance was a related party, it could not participate in CoC proceedings. ITSL, as the debenture trustee representing ECL's interests, was also ineligible for inclusion.

The Court accordingly dismissed the appeal.

(KNN Bureau)