Supreme Court: debenture trustee and lender can be 'related party' to a corporate debtor under IBC

The Supreme Court, in ECL Finance Ltd. v. Abhinav Mukherjee, dismissed appeals by a debenture trustee (IDBI Trusteeship Services) and a debenture holder/lender (ECL Finance) against NCLAT orders affirming that they were 'related parties' of the corporate debtor, Palm Developers Pvt. Ltd., under Section 5(24) of the Insolvency and Bankruptcy Code, 2016, and so could not sit on the Committee of Creditors formed under Section 21. The Court held that 'control' under Section 5(24) means positive, proactive control over management or policy decisions, not merely the power to block a resolution.

Applying the test of whether a party is 'in the driving seat' of the corporate debtor, drawn from company-law precedent on takeover regulations, the bench found ECL had taken over management rights, board nominations and operational control of the debtor through loan and security documents, and that a forensic audit showed funds were fraudulently diverted through the debtor to related entities. The two-judge bench of Justices J.B. Pardiwala and K. Vinod Chandran found no error in the NCLAT's factual findings and dismissed both the civil appeals and the related contempt petitions.