Supreme Court Bars ECL Finance and Debenture Trustee from CoC

The Supreme Court of India, in ECL Finance Ltd. & Anr. v. Abhinav Mukherjee & Ors., 2026 INSC 1159, considered whether a debenture holder and lender with wide supervisory rights over a corporate debtor can be a “related party” under Section 5(24)(m)(i) of the Insolvency and Bankruptcy Code, 2016 (IBC). The Court said yes. It held that participation in policy-making is enough, and that the stricter “control” test under Section 29A does not apply. Such a creditor cannot sit on the Committee of Creditors (CoC).

Facts of the Case

Palm Developers Pvt. Ltd., the Corporate Debtor (CD), had guaranteed the obligations of Saha Infratech Pvt. Ltd. (SIPL). SIPL had issued non-convertible debentures, and only the first tranche of ₹110 crore was subscribed. All of it is held by ECL Finance Ltd. (ECL), with IDBI Trusteeship Services Ltd. (ITSL) as Debenture Trustee. ECL also gave SIPL a ₹90 crore revolving credit facility under a Facility Agreement dated 22 September 2017. The CD guaranteed this too, so ECL stood in two capacities, as debenture holder and as lender.

CIRP against the CD began on 27 January 2020. ITSL claimed about ₹131.17 crore and ECL about ₹139.02 crore, and both were included in the CoC. A homebuyer objected. The NCLT held that the claims were not financial debt and that both appellants were related parties. The NCLAT affirmed, and the appeals followed.

The Main Issue

The Court dealt with four questions. Can a corporate guarantee be financial debt if it was not invoked before CIRP? Can an individual homebuyer object when homebuyers are represented as a class through an Authorised Representative? Were the appellants related parties under Section 5(24)(m)(i), and so barred by the first proviso to Section 21(2)? And could ECL’s later assignment of its rights save its claim?

The homebuyer objected that the creditors controlled board decisions, key managerial appointments, business plans, sale of units, and project revenue. The main question was whether these rights amounted to “participation in policy-making processes” of the CD.

Supreme Court’s Analysis

On financial debt, the Court held that the NCLT had misread Anuj Jain v. Axis Bank. It also held that the NCLAT erred in rejecting the claims because the guarantee was not invoked before CIRP. Relying on China Development Bank v. Doha Bank (2025) 7 SCC 729, it said Section 5(8) does not require a default. Default under Section 3(12) matters only when CIRP is initiated under Section 7.

On locus, the Court upheld the homebuyer’s right to object. It followed Phoenix ARC v. Spade Financial Services (2021) 3 SCC 475, which also held that an earlier order passed without hearing the affected creditors does not create res judicata.

The main discussion was on “related party”. The tribunals had relied on ArcelorMittal India v. Satish Kumar Gupta (2019) 2 SCC 1, where “control” under Section 29A(c) and (g) was read as positive, proactive control and not a mere power to block. Justice Chandran distinguished it. Section 5(24)(m)(i) only requires association through participation in policy making, so the standard is “a tad lesser”. A creditor need not be in the driving seat, and a role of navigation in determining policy and channelling business interests is enough.

The Court then looked at the documents together. Clause 7.1 of the CD’s Articles of Association sent deadlocks on board or shareholder matters to the debenture holder or lender, whose decision was final and binding. An amendment to the Debenture Trust Deed dated 16 January 2017 let the Trustee approve quarterly construction budgets, and the CD, as security provider, was bound by them. The Sanction Letter and Facility Agreement gave ECL the right to appoint a nominee director and an observer, barred removal of key managerial personnel without its consent, and allowed it to appoint sales agents. A Power of Attorney gave it wide powers over construction, approvals, sales and escrow of proceeds.

The Court called this “all-pervasive control” and held that it was not merely negative or restrictive. It was also not relevant that these rights were never actually exercised, because the business was under ECL’s overall supervision.

The disqualification then followed through the structure. As ECL holds all the debentures and is a related party, it cannot participate in the CoC as a debenture holder. Under the explicit terms of the Debenture Trust Deed, it is disabled as a lender too. ITSL, which protects the debenture holder’s interests, is excluded as well. The Court added that a plain financial creditor outside Section 21(6) or (6A) might not have been disqualified.

Finally, the Court rejected ECL’s assignment of its Facility Agreement rights to the second appellant. Under Phoenix ARC, assignees are protected only where the debt was legitimately taken over or the related-party status ended “long ago”. Here the assignment came long after CIRP began. Taking note of the forensic audit finding that the CD was used as a vehicle to divert funds, the Court held the assignment was not bona fide and was meant to defeat the proviso to Section 21(2).

Ratio and Significance

The ratio is that a creditor whose contractual rights give it a navigating role in the debtor’s policy and business decisions is a related party under Section 5(24)(m)(i). The “control” test of Section 29A does not apply, and actual exercise of the rights is not required. A related-party debenture holder’s disqualification extends to its Trustee and to its status as a lender.

The judgment is also important for lenders, since covenants giving deep management oversight can cost them their seat on the CoC. It does not mean every debenture trustee is excluded. ITSL was excluded because it represented ECL, the sole debenture holder, who was itself disqualified.

Conclusion

The Court found no question of law and no perversity in the NCLAT’s findings of fact. It dismissed both appeals, closed the contempt petitions, and rejected the pending applications.

By holding that navigation of policy is sufficient, the Court has widened the net for excluding conflicted creditors from the CoC and protected the integrity of the resolution process.