The country's top court has ordered Edelweiss Group's non-banking financial company (NBFC) ECL Finance Ltd. in a landmark case related to corporate insolvency and real estate sector. and its debenture trustee IDBI Trusteeship Services Ltd. Has been dealt a severe blow. The Supreme Court, while confirming the decision of the National Company Law Appellate Tribunal (NCLAT), has completely banned both the financial institutions from joining the Creditors Committee (CoC – Committee of Creditors) of Palm Developers Private Limited and exercising voting rights. The court clarified that even if an institution technically appears to be only a financial creditor, if it has a strong influence over the decisions, flow of funds and internal management of the company through contracts and terms, then it would directly fall within the ambit of 'Related Party' under the Insolvency and Bankruptcy Code (IBC). Loans, Guarantees and Insolvency Process: What is the crux of the whole controversy? This entire legal battle started with the huge loan given to the main borrower company Saha Infratech Private Limited (SIPL). ECL Finance had provided non-convertible debentures (NCDs) of ₹160 crore and a term loan facility of ₹90 crore to SIPL, with ECL itself as the sole debenture holder and IDBI Trusteeship as the debenture trustee. Real estate company Palm Developers Private Limited (Corporate Debtor/Builder) was made the corporate guarantor for this huge loan. When SIPL and the guarantors failed to make timely payments, a corporate insolvency resolution process (CIRP) was initiated against Palm Developers. Subsequently, ECL Finance entered the CoC as financial creditors with huge claims of approximately ₹139 crore and IDBI Trusteeship with huge claims of approximately ₹131 crore. Due to such a big claim, they got unilateral dominance over the total voting share of the Creditors Committee, due to which the voice of the real stakeholders of the project i.e. home buyers started getting completely suppressed. Homebuyers' legal fight and lender's 'over-control' exposed A homebuyer, who invested his entire life's savings in the stalled residential project of Palm Developers, has approached NCLT against this involvement. The homebuyer's petition, presenting concrete documents, alleged that ECL Finance was not merely an external lender but had all-round control over the builder's projects, budget allocation, sale rates of flats, withdrawal of funds from escrow accounts and financial diversion through extremely strict terms of loan agreements and debenture trust deeds. When the case reached the Supreme Court bench, the court conducted a thorough scrutiny of the contracts. The court found that the lenders had extraordinary powers to resolve company board-level deadlocks, veto the appointment of key managerial officers (KMPs), and dictate day-to-day business and policy decisions, which went beyond the normal lender protection clauses and amounted to pervasive control. 'Driving seat' is not necessary, the role of 'navigator' will also be created. Related Party The Supreme Court, in its historic decision, decided a very important interpretation of the law. The bench clarified that to prove an entity as a related party under Section 5(24)(m)(i) of the IBC, it is not mandatory for it to be in the 'driving seat' of the company, i.e. a direct board member or shareholder. If a lender is playing the role of a 'navigator' behind the scenes controlling the company's direction, policy-making process and cash flow, then he is no longer an impartial lender. According to Section 21(2) of IBC, no related party can vote in the meeting of the creditors committee, so that the sanctity of the insolvency process is maintained. The court also underlined that the ploy of transfer of loan rights to a third party to avoid legal hassles after the commencement of insolvency process cannot be considered as fair, rather it was an attempt to retain possession of the CoC through the back door which is completely rejected. New power for home buyers and a big lesson for the financial world. This decision has brought huge relief to hundreds of homebuyers of Palm Developers. With the removal of voting power from the CoC on the claims of ECL Finance and Trustees amounting to about Rs 270 crore, the voting percentage of home buyers has come to majority, which will pave the way for completing the construction of flats by handing over the project to a competent builder. Along with this, this decision has become a serious warning for all the banks, NBFCs and private credit funds of the country. Now, while giving loans, lenders will not be able to impose such aggressive and internal control clauses on companies which make them shadow directors of the company, because such lenders will have to lose their voting seats if the company gets into trouble.
