The Supreme Court has dismissed appeals filed by ECL Finance Limited and IDBI Trusteeship Services Limited, upholding their exclusion from the Committee of Creditors (CoC) of Palm Developers Private Limited under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court found that contractual arrangements gave ECL substantial influence over the corporate debtor's management and policy decisions, making it a related party for the purposes of insolvency proceedings.
Background
The dispute arose from financial arrangements involving Saha Infratech Private Limited, which issued debentures and obtained loan facilities from ECL Finance. Palm Developers Private Limited acted as a corporate guarantor for these obligations.
Following the commencement of Palm Developers' corporate insolvency resolution process in January 2020, IDBI Trusteeship Services and ECL submitted claims exceeding ₹131 crore and ₹139 crore, respectively. Initially included in the CoC, their participation was challenged by a homebuyer who argued that they were related parties and should be excluded.
The National Company Law Tribunal (NCLT) ruled against their inclusion, and the National Company Law Appellate Tribunal (NCLAT) upheld that decision. The companies subsequently approached the Supreme Court.
The Court examined whether the contractual rights available to ECL amounted to participation in the corporate debtor's policymaking under Section 5(24)(m)(i) of the IBC. It distinguished this test from the stricter concept of control applicable in certain other provisions of company law.
The judgment explained:
"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."
Examining the company's Articles of Association, the debenture trust deed, and the facility agreement, the Court found that ECL had significant powers over project budgets, management appointments, business operations, and the handling of project revenues.
The Court observed:
"From the above, it is crystal clear that ECL has an all-pervasive control, insofar as the projects of the principal Borrower are concerned, for facilitating which the debentures were issued and the Term Loan Facility extended."
The Bench held that these arrangements demonstrated more than merely protective or restrictive rights. Since ECL qualified as a related party, it could not participate in the CoC. The debenture trustee, which represented ECL's interests, was also ineligible for inclusion.
The Court further rejected the assignment of loan rights as a basis for avoiding exclusion, finding that the transfer occurred after the insolvency process began and did not satisfy the test of a bona fide assignment.
Concluding that the NCLAT's decision disclosed no valid ground for interference, the Court held:
"We find absolutely no question of law arising from the order of the NCLAT and we find no perversity insofar as the analysis of facts leading to the conclusion of the appellants being related party under Section 5(24). No valid ground vitiates the impugned order, and we find no reason to cause interference."
The Supreme Court dismissed both appeals, closed the connected contempt petitions, and rejected any pending applications.
