IBC | 'Role Of Navigation' In Policy Making Suffices To Bar Related Party From CoC, 'Driving Seat' Control Under Sec 29A Not Required: Supreme Court

"The rigour to find a financial creditor to be a related party under Section 21 read with the second proviso and sub-section (6A)(a), is a tad lesser than that required to find 'control' under Section 29A (c) and (g). 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." Supreme Court, in a significant ruling delivered on October 27, 2026, held that determining whether a financial creditor is a "related party" under Section 5(24)(m)(i) of the Insolvency and Bankruptcy Code, 2016 (IBC) does not demand the stringent standard of proactive "driving seat" control required under Section 29A.

A bench comprising Justice J.B. Pardiwala and Justice K. Vinod Chandran affirmed that where a creditor holds pervasive contractual authority to steer policy, approve budgets, and break board deadlocks, it participates in policy-making processes and stands disqualified from representation, participation, or voting in the Committee of Creditors under the first proviso to Section 21(2) of the Code.

The dispute arose during the Corporate Insolvency Resolution Process of Palm Developers Private Limited, which had stood as corporate guarantor for term loan facilities and non-convertible debentures issued by Saha Infratech Private Limited. Debenture trustee IDBI Trusteeship Services Limited and sole debenture holder-cum-lender ECL Finance Limited submitted claims before the Resolution Professional and were initially inducted into the Committee of Creditors. An individual homebuyer objected before the Adjudicating Authority, alleging that the lenders exercised pervasive control over the corporate debtor's management and constituted related parties. Both the National Company Law Tribunal and the National Company Law Appellate Tribunal excluded the lenders from the Committee of Creditors, prompting the present appeals before the apex court.

The primary question before the court was whether a financial creditor and its debenture trustee can be classified as related parties under Section 5(24)(m)(i) of the IBC without meeting the proactive "control" threshold stipulated under Section 29A(c) and (g). The court was also called upon to determine whether a corporate guarantee qualifies as a financial debt without prior invocation, and whether an individual homebuyer has locus to challenge Committee of Creditors membership independent of the Authorized Representative.

Guarantee Constitutes Financial Debt Even If Not Invoked Prior To CIRP

The bench addressed the initial findings regarding the admissibility of claims arising from uninvoked corporate guarantees. The court held that the appellate tribunal erred in observing that claims could not be entertained merely because the corporate guarantee had not been invoked prior to the commencement of the insolvency process.

Relying on its earlier ruling in China Development Bank v. Doha Bank Q.P.S.C. and Others, the bench underscored that Section 5(8) of the IBC does not mandate that a credit facility qualifies as a financial debt only upon the occurrence of a default. The bench observed that the definition of default under Section 3(12) becomes material solely for initiating insolvency proceedings under Section 7, and once a financial debt exists, a creditor is entitled to submit claims upon the public announcement.

Individual Creditor In A Class Retains Independent Locus To Challenge CoC Composition

The court firmly rejected the appellants' objection regarding the locus standi of an individual homebuyer who challenged the constitution of the Committee of Creditors outside the Authorized Representative. The bench noted that under Section 21(6A)(b) of the IBC, the statutory mandate of an Authorized Representative is confined to attending meetings and voting on behalf of a class of creditors.

Applying the precedent in Phoenix ARC Private Limited v. Spade Financial Services Limited, the court held that an individual creditor is fully entitled to approach the Adjudicating Authority to seek exclusion of related parties. The bench reiterated that when claims are collated without hearing all stakeholders, affected financial creditors are legitimately within their rights to challenge the unlawful inclusion of related parties.

Lesser Threshold Under Section 5(24) Compared To Section 29A Control

The Supreme Court engaged in a detailed doctrinal comparison between the disqualification criteria under Section 29A(c) and the related party definition under Section 5(24)(m)(i) of the IBC. Examining ArcelorMittal India Private Limited v. Satish Kumar Gupta and Subhkam Ventures (I) Private Limited v. SEBI, the bench acknowledged that Section 29A contemplates positive and proactive de facto control where an entity occupies the actual "driving seat."

However, the bench clarified that Section 5(24)(m)(i) sets a noticeably different benchmark by merely requiring association with the corporate debtor on account of "participation in policy making processes." The court ruled that proactive dominance is unnecessary to trigger the related-party exclusion from the Committee of Creditors under the first proviso to Section 21(2).

Pervasive Contractual Powers Over Governance And Finance Establish Related-Party Status

Scrutinizing the Debenture Trust Deed, Facility Agreement, and Articles of Association of the corporate debtor, the bench identified sweeping powers vested in the lenders. These contractual stipulations included nominee directorships insulated from liability, mandatory referral of board and shareholder deadlocks to the lender's nominee for binding decisions, absolute approval rights over quarterly construction budgets, and veto powers over the removal of key managerial personnel.

The bench highlighted that the lenders also exercised exclusive control over project escrow accounts and held powers of attorney governing property registrations, labour contracts, and sales distributions. The court observed that such extensive mechanisms do not reflect mere negative covenants to safeguard financial exposure, but confer a comprehensive supervisory role over business operations and corporate policies.

"The pervasive control conferred on the sole Debenture Holder also disables the Debenture Trustee, the ITSL, who is protecting the interest of the Debenture Holder, from being included in the CoC."

Disqualification Of Sole Debenture Holder Disables Debenture Trustee

Addressing the representative capacity of the Debenture Trustee under Section 21(6A)(a), the court held that the trustee cannot stand on an independent footing when representing a sole debenture holder that is itself a related party. Because ECL held the entirety of the debenture issue and was disqualified due to policy-making participation, the trustee acting to secure those exact interests stood equally disabled.

The bench affirmed that the corporate debtor's Articles of Association and the underlying loan covenants established overall supervision in policy implementation. Consequently, ECL was disqualified from the Committee of Creditors in both its capacities as debenture holder and term loan lender, carrying over that disability to the trustee.

Post-CIRP Debt Assignment Cannot Circumvent First Proviso To Section 21(2)

The court also scrutinized the post-commencement assignment of the facility agreement by ECL to a co-appellant. Drawing upon the Insolvency Law Committee Report of 2020 and the principles in Phoenix ARC, the bench noted that an assignee cannot escape the related-party bar if the debt transfer was executed to circumvent the statutory prohibition in bad faith.

Taking judicial note of a forensic audit report revealing that the corporate debtor had been utilized as a conduit to siphon project funds to connected promoter entities under lender charges, the bench held that the assignment made long after the initiation of the insolvency process failed the test of a bona fide transaction.

The Supreme Court dismissed the civil appeals and closed the connected contempt petitions, upholding the concurrent orders of the NCLT and NCLAT excluding both the lenders from the Committee of Creditors. The bench solidified the legal principle that financial creditors exercising navigatory authority over corporate policy and operational governance constitute related parties under Section 5(24)(m)(i) of the IBC, barring them from participating in creditor voting bodies.

Date of Decision: October 27, 2026