No driving seat needed: Supreme Court keeps ECL Finance out of Palm Developers CoC as a related party
Justice J.B. Pardiwala and Justice K. Vinod Chandran hold that Section 5(24) of the IBC asks less than the control test of Section 29A, treat ECL Finance and IDBI Trusteeship as related parties of Palm Developers, and reject a post-CIRP assignment as not bona fide.
A lender does not have to be in the driving seat of a company to be its related party under the Insolvency and Bankruptcy Code, 2016. It is enough that it steers. On 27 October 2026 the Supreme Court dismissed appeals by ECL Finance Limited and its debenture trustee, IDBI Trusteeship Services Limited, against orders of the National Company Law Tribunal and the National Company Law Appellate Tribunal that had thrown them out of the Committee of Creditors of Palm Developers Private Limited, a real estate company in insolvency. A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran held that the test for a related party under Section 5(24)(m)(i) of the Code, participation in the corporate debtor’s policy making, is lighter than the positive control the Court demanded in ArcelorMittal for disqualifying a resolution applicant under Section 29A. ECL, with powers over board deadlocks, construction budgets, key personnel and sales, cleared that lower bar comfortably.
The appellants won two points along the way. The Court held that the NCLT had misread Anuj Jain in treating a guarantor’s liability as something other than financial debt, and that the NCLAT was wrong to say the claim could not be entertained because the corporate guarantee had not been invoked before insolvency began. Neither point saved the appeal. The Court also went a step further than the parties had argued, holding that ECL’s assignment of its loan rights to a second appellant after the insolvency process had started was not a bona fide assignment and could not get the assignee into the committee by the back door.
Rs 110 crore in debentures, a Rs 90 crore facility and one guarantor
Justice Vinod Chandran, who wrote the judgment for the bench, opened by separating the two appellants that the NCLAT had treated as what he called an undifferentiated monolith. ECL wore two hats in its dealings with Saha Infratech Private Limited, the principal borrower. It was SIPL’s lender, and it was the holder of SIPL’s debentures. ITSL was the trustee for those debentures. Palm Developers, the corporate debtor, was guarantor for both the debentures and the loan.
In June 2016 SIPL proposed non-convertible debentures of Rs 1 crore face value each, for Rs 160 crore in two tranches of 110 and 50 debentures, to fund its projects. ITSL was appointed trustee by a Debenture Trustee Agreement of 18 May 2016, and the Debenture Trust Deed of 13 May 2016 earmarked part of the subscription for the construction of ‘Project Encore’ at Greater Noida, Uttar Pradesh. Only the first tranche of Rs 110 crore was ever subscribed, and ECL now holds every one of those debentures. Palm Developers gave an unconditional and irrevocable corporate guarantee; the deed also provided for a first charge and mortgage over the Project Encore land and buildings, hypothecation of the project receivables and an escrow account for its revenue.
The following year SIPL went back to ECL for a revolving credit facility of Rs 90 crore, by a letter of 13 June 2017. The Facility Agreement of 22 September 2017 named SIPL as principal borrower and Palm Developers as Obligor No. 5, the guarantor. It required first charges and mortgages over existing and intended projects, personal and corporate guarantees, an irrevocable and unconditional corporate guarantee from Palm Developers under a separate guarantee agreement of the same date, and a pledge of Palm Developers’ shares by its shareholders. The corporate debtor, as the Court put it, had a dual obligation to secure ECL’s interest, as debenture holder and as lender.
Palm Developers went into the Corporate Insolvency Resolution Process when a Section 7 petition was admitted on 27 January 2020. On 10 February 2020 ITSL, as debenture trustee, claimed Rs 131,17,23,044 as on 29 February 2020. ECL claimed Rs 139,02,83,168.68 under the term loan facility. Both were admitted as financial creditors and seated on the Committee of Creditors.
One homebuyer objects, and two tribunals disagree on why he is right
The objection came from a single homebuyer. He was a financial creditor in a class, but he moved the NCLT individually rather than through the authorised representative appointed for the homebuyers as a group. The NCLT accepted his locus and ruled against the appellants on two grounds. First, it held that their claims were not financial debt at all, because Palm Developers had incurred no financial debt and no money had been disbursed to it directly. Second, it held that both ECL and ITSL were related parties under Section 5(24)(m)(i).
The NCLAT disagreed with the first ground. It found the ratio of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Limited inapplicable, and the Supreme Court agreed: the NCLT had misread that decision, since the very passage it extracted said that financial debt may include liability in respect of a guarantee or indemnity for the items listed in the definition. But the NCLAT then took a different wrong turn, the Court found. It held that the appellants’ claim could not be entertained because the corporate guarantee had not been invoked before the CIRP commenced.
The Court rejected that reasoning on the authority of China Development Bank v. Doha Bank Q.P.S.C., decided in 2025. There, lenders to the Reliance Communications group had sought seats on a committee on the strength of deeds of hypothecation executed jointly by the group companies, one of which was the corporate debtor, under a master security trustee agreement with Axis Trustee Services. The objection was that no default under the deeds had occurred. The Court held that nothing in Section 5(8) makes a facility a financial debt only when default occurs; under Section 5(7) anyone to whom financial debt is owed is a financial creditor, default or no default; and the definition of default in Section 3(12) matters only when a financial creditor invokes Section 7(1) to start a CIRP. Once financial debt exists, the claim arises and is to be submitted on the public announcement of the CIRP.
On locus, the NCLAT had relied on Phoenix ARC Private Limited v. Spade Financial Services Limited and on its own ruling in Aashray Social Welfare Society v. Saha Infratech Pvt. Ltd., which held that the authorised representative stands in for homebuyers only for the limited purpose of attending committee meetings and voting. The fact that the representative had not filed the application did not strip an individual homebuyer of the right to be heard. The Court added that Phoenix ARC itself answered a similar objection. In that case the NCLT had let two entities resubmit claims as financial creditors without any committee member being heard, and the Supreme Court held that the later challenge by two other financial creditors was not barred by res judicata; they were legitimately within their rights to seek exclusion of the two entities as related parties. That dictum, Justice Vinod Chandran wrote, squarely covered a homebuyer who had objected before the NCLT to the appellants’ inclusion.
Where the ArcelorMittal driving-seat test stops
That left one question: were the appellants related parties of Palm Developers within Section 5(24), and so barred from representation, participation or voting in the committee by the first proviso to Section 21(2)? The Court set out the text it was working with. Section 5(24)(m)(i) makes a related party of any person associated with the corporate debtor on account of participation in its policy making processes. The proviso to Section 21(2) strips a related-party financial creditor, or the authorised representative of a related-party financial creditor referred to in sub-sections (6) and (6A), of any right to be represented, participate or vote. Section 21(6A)(a) covers financial debt in the form of securities or deposits whose terms provide for a trustee or agent to act for all the financial creditors, and makes that trustee act on their behalf.
The NCLAT had reached its finding by leaning on ArcelorMittal India Private Limited v. Satish Kumar Gupta. The Court explained what that case decided and why it did not govern. ArcelorMittal concerned Section 29A(c), which disqualifies a resolution applicant if the corporate debtor is under its management, under its control, or is a person of whom it is a promoter. Reading the definition of control in Section 2(27) of the Companies Act, 2013, the Court there described a first part, de jure control including the right to appoint a majority of directors, and a second part, de facto control, present wherever a person acting alone or in concert can positively influence management or policy decisions. It held that control in Section 29A(c) means positive control; a mere power to block special resolutions is not enough. The Court approved the Securities Appellate Tribunal’s decision in Subhkam Ventures (I) Private Limited v. SEBI, which asked whether the acquirer controls the steering, the accelerator, the gears and the brakes, and declared in paragraph 53 that clauses (c) and (g) of Section 29A require de jure or de facto proactive and positive control, not mere negative control.
Section 5(24), read with the proviso to Section 21(2) and Section 21(6A), carries no such requirement, the Court held. Sub-clause (m)(i) asks only for association with the corporate debtor by way of participation in its policy making. ECL’s status as debenture holder, the interest ITSL protects as trustee, admittedly falls under Section 21(6A)(a). The rigour needed to find a financial creditor a related party under Section 21 is, in the Court’s words, “a tad lesser” than that needed for control under Section 29A(c) and (g). The judgment then stated the standard in a single sentence: 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”.
Deadlock votes, quarterly budgets and a power of attorney
With that standard fixed, the Court turned to what the homebuyer had put before the NCLAT, as listed in paragraph 37 of the impugned order: control over the decisions of the board; the final say in any deadlock at a board or shareholders’ meeting; control over the appointment and removal of key managerial personnel; control over approval and modification of business plans; control over how units were sold, over sales to prospective customers and registration before the Registrar; control over all revenue and other accounts; and the role of selling partner of the corporate debtor. The NCLAT had tested these against the sanction letter, the Articles of Association, the Facility Agreement and the builder-buyer agreement. The Supreme Court dealt separately with the debenture side and the loan side, since each gave rise to a separate claim.
On the debenture side, Clause 7.1 of Palm Developers’ Articles gave the debenture holders and lenders the right, on an event of default, to appoint a nominee director, and obliged the promoters to pass whatever board and shareholder resolutions were needed to make that happen. The same clause went further. Any deadlock at a board or shareholders’ meeting was to be referred to the nominee director of the debenture holder or lenders, or to the debenture holders or lenders themselves, for a final decision that would bind the promoters. An amendment to the Debenture Trust Deed on 16 January 2017 added a budget approval mechanism: the debenture trustee, as monitoring agent, could approve the quarterly construction budget or require the issuer and the security providers to modify it, and money would be released from the escrow account only in line with the approved budget. The Court held that this clearly conferred a proactive role on the debenture holder and the trustee in steering not only SIPL through difficult times but also Palm Developers, the security provider.
On the loan side, the special conditions of the sanction letter gave ECL an absolute right to appoint a director on the borrower’s board, indemnified by the borrower against liability and seated on every board committee, and a right to appoint an observer on the board of the borrower or the management of the security providers, who had to receive every notice, resolution and agenda. Clause 6.8 of the Facility Agreement, headed ‘Management’, barred the removal of any managerial personnel with substantial powers, of either borrower or obligor, without the lender’s consent, and required them to appoint or change technical, financial and executive staff in key posts to the lender’s satisfaction if the business plan and project milestones were missed. ECL could send in any technical, management or consultancy firm to inspect the working of the borrower or obligor, and have cost accountants or chartered accountants examine their accounting systems, at the borrower’s expense.
Clause 21 of the sanction letter let ECL appoint real estate agents or distributing agents on behalf of Palm Developers to sell residential units across the promoters’ projects. A power of attorney from the borrower and obligor gave ECL what the Court called sweeping powers over construction: obtaining statutory sanctions and approvals, raw material supply, appointing labour, building the project itself, communicating with purchasers, finalising sales and ensuring that sale proceeds stayed in escrow. Clause 4.1 of the Articles, extracted by the NCLAT in paragraph 53, placed project revenues, including payments by Palm Developers’ allottees, in ECL’s direct control.
From all this, the Court found it “crystal clear that ECL has an all-pervasive control” over the principal borrower’s projects, and that Palm Developers’ own Articles showed the same control over its management. This was not a merely restrictive or negative control. The argument that the powers had never actually been exercised got no purchase: policy implementation and the business itself ran under ECL’s overall supervision, as debenture holder through the trustee and as term lender. If ECL cannot sit on the committee as debenture holder, and it holds every debenture, then ITSL, which exists to protect the debenture holder’s interest, cannot sit there either.
The Court then closed a gap the appellants might have used. Had ECL been only a financial creditor outside sub-sections (6) and (6A) of Section 21, and not represented by an insolvency professional under Section 24(5), the first proviso to Section 21(2) would not have disqualified it. But ECL is the debenture holder, disabled from the committee by the express terms of the Debenture Trust Deed, and that disability carries over to its status as lender. The pervasive control vested in the sole debenture holder shuts out the trustee too.
An assignment made after the insolvency began
Though the point had not been specifically argued, the Court noticed that ECL had assigned its rights under the Facility Agreement to the second appellant in its appeal. Phoenix ARC had ruled on when such assignees escape the related-party label: where they have legitimately taken over the debt, or where the related party stopped being one long ago. That judgment had also relied on the Insolvency Law Committee Report of 2020, which cautioned that before admitting the assignee of a related-party financial creditor to the committee, the resolution professional should verify that the assignee is not itself a related party, and that where a related party is shown to have assigned its debt in bad faith or with fraudulent intent to vitiate the proceedings, the assignee should be treated like a related-party financial creditor under the proviso to Section 21(2).
Here it was ECL that had lodged the claim with the resolution professional; the assignment came long after the CIRP had commenced. It was not ‘long ago’ but very recent, and the Court held that it could only be read as a device to defeat the proviso and get into the committee. The forensic audit report that the NCLAT had specifically noticed weighed in the same direction. That report stated that Palm Developers, the corporate guarantor, had been fraudulently used as a vehicle to move funds from SIPL to two other companies controlled by Palm Developers’ promoters, over whose assets ECL has complete charge. It also stated that the very project, ‘Meghdutam Encore’, had been initiated fraudulently with no intention of completing it, in order to defraud the homebuyers and mortgage it for loans from financial creditors whose funds would be diverted to connected entities. The assignment failed the test of a bona fide assignment, and the second appellant could not participate in the committee.
Order
The Court found no question of law arising from the NCLAT’s order and no perversity in its analysis of the facts leading to the conclusion that the appellants are related parties under Section 5(24). Civil Appeal No. 6268 of 2022, by ECL Finance and its assignee, and Civil Appeal No. 6273 of 2022, by IDBI Trusteeship Services, stand dismissed. Contempt Petition (C) Nos. 730 and 731 of 2023, filed in the two appeals, stand closed. Pending applications are rejected. Senior Advocate Gaurav Mitra appeared for the appellants; Senior Advocates Jayant Mehta and Arijit Prasad appeared for the respondents.