Mere Commercial Association, Historical Linkage Cannot Make Entity Related Party Under IBC: NCLT Chennai

The Chennai Bench of the National Company Law Tribunal (NCLT) has held that mere commercial association, historical linkage or institutional connection cannot, by itself, make an entity a “related party” under Section 5(24) of the Insolvency and Bankruptcy Code, 2016 (IBC).

A Division Bench comprising Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy on 27 July set aside the classification of SREI Equipment Finance Limited (SEFL) and SREI Infrastructure Finance Limited (SIFL) as related parties of AMRL Hitech City Limited and directed their inclusion in the Committee of Creditors (CoC). The Tribunal held:

“The material relied upon by the Resolution Professional undoubtedly establishes that the entities in question formed part of a broader commercial ecosystem and shared certain historical and institutional linkages. However, the existence of such linkages, by itself, does not answer the statutory enquiry. The enquiry required under Section 5(24) is not whether entities are connected in a broad commercial sense, but whether they stand related through a legally cognizable relationship involving management, control, decision-making authority or other circumstances specifically contemplated by the statute.”

The Resolution Professional (RP) had classified SEFL and SIFL as related parties of the Corporate Debtor, resulting in their exclusion from the CoC. The RP relied on an alleged chain of control involving SIFL, Trinity Alternative Investment Managers Limited (TAIML), SREI Alternative Investment Trust (SAIT) and its Infrastructure Resurrection Fund (IRF).

SIFL held 51% in TAIML, while TAIML managed SAIT. SAIT, through IRF, held 58.61% of the Corporate Debtor. The RP therefore contended that SIFL exercised indirect control over the Corporate Debtor through TAIML and SAIT.

The Tribunal found that the alleged chain of control broke at the TAIML-SAIT link. Under the Investment Management Agreement, TAIML's powers were delegated by and derived from the Trustee and could not be exercised independently. The Tribunal held that the relationship was therefore one of agency rather than control.

It noted that voting rights in the Corporate Debtor's shares vested with the Trustee, while investment decisions were taken by an independently constituted Investment Committee. The regulatory framework governing Alternative Investment Funds also required the Investment Manager to act in a fiduciary capacity towards investors.

The Bench referred to Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. and ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta and held that while the related-party provisions must prevent abuse of the insolvency process, “control” cannot be extended to every commercial association, influence, business relationship or historical linkage. Legal control requires the ability to determine, direct or materially influence an entity's management, policy or affairs.

It also held that transaction-audit observations and pending allegations in Section 66 proceedings could not, by themselves, constitute conclusive proof of related-party status.

Accordingly, the NCLT set aside the classification of SEFL and SIFL as related parties and their consequential exclusion from the CoC. It directed the RP to reconsider their full claims, including interest and overdue installments, and treat them as eligible financial creditors. It further directed the RP to reconstitute the CoC by including the applicants with the appropriate voting share within four weeks.