IBC Related-Party Test: Supreme Court on Lender Policy Rights and CoC Voting
Updated: 3 days ago
In ECL Finance Ltd v Abhinav Mukherjee (2026 INSC 1159), decided on 27 October 2026, the Supreme Court explained that the related-party test in section 5(24)(m)(i) of the Insolvency and Bankruptcy Code, 2016 (IBC) asks whether a person participated in the corporate debtor’s policy-making. The Court said this does not require the proactive-control standard discussed under section 29A(c) and (g).
The Court examined contractual rights and their practical effect together. In this case, rights concerning deadlock decisions, budgets, management, sales and revenue arrangements showed a role in navigating the corporate debtor’s business policy. The related-party financial creditor could not participate or vote in the committee of creditors (CoC). The ruling is fact-sensitive: it does not say that every lender consent or protective covenant makes a lender a related party.
What the Supreme Court decided
The case concerned debentures issued by Saha Infratech Private Limited, with Palm Developers Private Limited as the corporate debtor and guarantor. ECL Finance held the debentures. The Court examined ECL’s debenture-holder position and the combined rights in the transaction documents, finding that the package also disabled it in its lender capacity. The rights affected how important business decisions could be taken, including deadlocks, budgets, management, project sales and the flow of sale proceeds.
Reading section 5(24)(m)(i) with the relevant CoC provisions in section 21, the Court rejected the argument that “participation in policy making” requires proactive control or that the person must occupy the “driving seat”. A person may influence the direction or navigation of policy without having day-to-day operational control. The Court assessed the rights cumulatively and in context, rather than treating one contractual clause in isolation.
On the facts before it, the Court held that ECL Finance was a related party and could not have representation, participation or voting rights in the CoC under the first proviso to section 21(2), read with section 21(6A)(a). It also held that IDBI Trusteeship Services Limited, acting to protect ECL’s debenture-holder interest, could not participate through the CoC in that representative capacity. The Court rejected a post-commencement assignment relied on by another appellant, finding that the transfer failed the bona fide assignment test in the circumstances before it. The appeals were dismissed.
Why this matters to lenders and insolvency professionals
A lender’s documents may do more than protect repayment. A package of rights can affect the debtor’s policy choices, particularly where it reaches into decision-making over budgets, senior management, commercial operations or how project revenue is handled. The statutory question is about the relationship described in the IBC, not the label used in the financing document.
The judgment therefore calls for a document-and-conduct review when related-party status is disputed. The analysis should consider the agreements as a whole and how the rights operated in practice. It should not jump from the presence of a veto or consent right directly to a conclusion that the lender is related.
Practice guide for professionals
For working-paper formats and review checklists on this topic, see the Audit Documentation & CARO 2020 Practical Guide (PDF, ₹299).
Practical review checklist
Collect the complete document set: facility and debenture documents, trust deeds, articles, side letters, powers of attorney, amendments and relevant board or management records.
Map rights affecting budgets, deadlock resolution, appointment or removal of managers, business plans, customer or sales decisions, project cash flows and escrow arrangements.
Distinguish routine information and narrowly tailored creditor protections from rights that can shape the debtor’s business policy when read with the other terms.
Record whether the rights were merely available on paper or were actually exercised, and identify who made or could finally make each decision.
Assess the statutory relationship under section 5(24) and the specific CoC consequence under section 21 separately; do not substitute a section 29A control test for the policy-making inquiry.
Examine any proposed assignment for its timing, commercial substance, beneficial ownership and bona fides. A transfer should not be assumed to cure a statutory disqualification merely because the paperwork changes the named holder.
This is a structured issue-spotting list, not a substitute for reviewing the actual documents and facts.
What the judgment does not establish
The Court did not announce that every lender with a consent right is a related party. The finding turned on the combined contractual and factual picture before the Court. A narrow restriction designed to preserve security or prevent a defined impairment may require a different analysis from a broad role in business policy. The answer depends on the statutory test, the full rights package and its operation.
Likewise, the ruling should not be described as a general rule that any transfer after insolvency commencement is invalid. The Court considered the assignment in the circumstances of this case and rejected it on the record before it. Any other assignment must be evaluated on its own timing, purpose, substance and applicable provisions.
Frequently asked questions
Does a lender become a related party merely because it has veto rights?
Not automatically. The relevant question is whether the rights, read together and in their context, amount to participation in policy-making under section 5(24)(m)(i). The Court examined the overall arrangement and its practical reach; it did not create a one-clause rule for every lender covenant.
Can a debenture trustee vote in the CoC for the debenture holder?
On these facts, the Court also excluded IDBI Trusteeship Services Limited when it acted to protect ECL’s interest as debenture holder. The result turned on that representative capacity and the related-party finding; it does not mean every debenture trustee is automatically barred. Interposing a trustee does not itself remove a disqualification that applies to the creditor it represents.
Does assigning a debt remove related-party disqualification?
The judgment rejected the assignment relied on in that case. It is unsafe to assume that a late transfer automatically cures the bar. The facts, purpose, timing, beneficial interest and statutory provisions must be assessed in each matter.
Primary sources
Related reading
This article is a general summary of a judgment and is not legal advice. The outcome in any matter depends on its documents, facts and applicable law.
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