Introduction
The Committee of Creditors (CoC) is the decision-making body in a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC) and its composition therefore matters greatly. Two questions that have come up often before the Supreme Court and the National Company Law Appellate Tribunal (NCLAT) is when should a financial creditor be treated as a “related party” and kept out of the CoC and how insiders are to be prevented from capturing a process meant to serve creditors as a whole in ECL Finance Ltd. & Anr. v. Abhinav Mukherjee & Ors. 2026 INSC 1159
Statutory Framework
Section 5(24) of the IBC defines “related party” through several relationships, including control, common directorship and kinship. Clause (j) covers a person who controls more than twenty per cent of the voting rights in the corporate debtor, whether through ownership or a voting agreement. The first proviso to Section 21(2) provides that a financial creditor who is a related party has no right of representation, participation or voting in CoC meetings. The object is to stop promoters and their associates from steering the CIRP through creditor votes.
Phoenix Arc: The Anti-Circumvention Principle
The leading authority is Phoenix Arc Pvt. Ltd. v. Spade Financial Services Ltd. ((2021) 03 SC). The Supreme Court noted that both the proviso to Section 21(2) and the definition in Section 5(24) are framed in the present tense, so that, by default, only a creditor which is a related party in praesenti is excluded.
The Court held that a creditor that ceases to be a related party due to change in circumstances or in order to escape the exclusion continues to remain within the bar. Otherwise, a related-party creditor could change its label before the CIRP begins and re-enter the CoC to influence decisions at the expense of other creditors. The inquiry thus looks to substance and intent, not merely to formal status.
Pledgees and the Twenty Per Cent Threshold
A practical difficulty arises where a financial creditor invokes a pledge over the shares of the corporate debtor. In PTC India Financial Services Ltd. v. Venkateswarlu Kari ((2022) 34 SC), the Supreme Court held that invocation, with the shares transferred to the pledgee, is not an “actual sale” under Section 177 of the Indian Contract Act, 1872. The pledgor may redeem until an actual sale to a third party, and the pledgee is at most a beneficial owner.
The concern is that a pledgee invoking more than twenty per cent of the shares gains corresponding voting rights and may fall within Section 5(24)(j). Read with Phoenix Arc, the better view is that the test is whether the creditor has a real nexus with the corporate debtor giving rise to a conflict of interest, or an independent and bona fide claim to a seat. A creditor which becomes a beneficial owner of more than twenty per cent solely through lawful invocation of a pledge remains an external creditor and is not disqualified from the CoC.
A different situation arose in Asset Reconstruction Company (India) Ltd. v. Vijay Group Realty LLP ((2025) 915 NCLT). There, the pledge was over shares held by the corporate debtor in its subsidiary and had not been invoked before the CIRP began. The NCLT, Mumbai Bench, held that such shares are an asset of the corporate debtor to be taken into custody by the Resolution Professional (RP) under Section 18(1)(f)(v) and that the moratorium under Section 14(1)(c) bars enforcement of the pledge. The timing of invocation relative to the insolvency commencement date was thus decisive.
Determination of Status by the Resolution Professional
In Hari Vitthal Mission v. Ravi Sethia ((2024) 720 NCLAT), the NCLAT held that the interim Resolution Professional and thereafter the RP who chairs CoC meetings, must decide whether a creditor is a related party when constituting the CoC. It also observed that a trust controlling the corporate debtor in the manner contemplated by the Code is itself a related party.
Assignments of Debt during the CIRP
Assignment of a related party’s debt is a recognised route for attempted circumvention. In Peanence Commercial Pvt. Ltd. v. Mamta Binani ((2024) 543 NCLAT), the assignor, a related party whose claim had been admitted, was denied a CoC seat. It then agreed to assign its debt, subject to the RP confirming that the assignee would be treated as a non-related party and admitted to the CoC.
The NCLAT found that no assignment had in fact taken place, as the agreement was contingent on the RP’s approval of the assignee’s seat. It upheld the finding that the exercise was mala fide and aimed at delaying the CIRP. The ruling confirms that a transfer made to acquire voting rights will be examined for its real purpose.
Conclusion
The decisions reflect a consistent approach. The Code excludes related parties to protect the integrity of the CoC, but exclusion is tied to a real conflict of interest and not to technical labels. Pledgees who acquire shares through lawful invocation are not disqualified by that fact alone, whereas contingent or manufactured claims, and strategic exits from related-party status, are liable to be disregarded. Phoenix Arc remains the principal guide for scrutinising collusive transactions and fake debts.
Shomdeepta Chanda
Associate
The Indian Lawyer & Allied Services
Editor’s Comments
The very purpose of excluding related party transactions is to ensure that the corporate debtor does not influence or effect the CIRP process that is undertaken to ensure that a resolution applicant who takes over the corporate debtor gets a fair chance to turn around the company. The very purpose of IBC is to restore companies that are not doing well, rather than liquidating them.
Sushila Ram Varma
Advocate and Chief Consultant
The Indian Lawyer & Allied Services
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