The Supreme Court has ruled that a lender and debenture holder exercising extensive control over the affairs of a real estate developer qualifies as a related party under the Insolvency and Bankruptcy Code (IBC) and is consequently barred from participating in the Committee of Creditors (CoC).
Dismissing appeals filed by ECL Finance Ltd. and IDBI Trusteeship Services Ltd. (ITSL), a bench of Justices JB Pardiwala and K Vinod Chandran held that the lender's extensive rights over the developer's board decisions, construction budgets, management and project revenues amounted to participation in the company's policy-making process.
The dispute arose during the insolvency proceedings of Palm Developers Ltd., which had guaranteed the financial obligations of Saha Infratech Pvt. Ltd. (SIPL). SIPL had issued non-convertible debentures worth Rs 110 crore, all of which were held by ECL Finance, with ITSL acting as the debenture trustee. SIPL had also availed of a Rs 90 crore revolving credit facility from ECL.
Following the commencement of Palm Developers' insolvency proceedings in January 2020, ITSL submitted a claim of around Rs 131 crore, while ECL claimed approximately Rs 139 crore. Both claims were initially admitted to the CoC. However, a homebuyer challenged their eligibility, following which the NCLT held that ECL and ITSL were related parties and could not participate in the creditors' committee.
The Supreme Court held that the test for determining whether an entity is a related party under Section 5(24)(m)(i) of the IBC is less stringent than the control test applicable to resolution applicants under Section 29A.