TaxTMI 
TaxTMI 
Indirect Corporate Control and Related-Party Classification in the Corporate Insolvency Resolution Process
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.... is not confined to direct ownership. The subsidiary relationship recognised by Section 2(87) of the Companies Act, 2013 extends to control exercised through another subsidiary of the holding company. • Accordingly, a corporate debtor may be a step-down subsidiary of an upstream holding company. That relationship attracts Section 5(24)(i). • Board-composition control is an independent route to related-party status under Section 5(24)(l). Common beneficial ownership and a corporate structure evidencing control may be relevant to that inquiry. • A financial creditor which is a related party of the corporate debtor is excluded from representation, participation and voting in the Committee of Creditors und....
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.... Key Issues / Provisions Related party under the IBC Section 5(24) of the IBC defines "related party", in relation to a corporate debtor. Two clauses were central to the determination: • Section 5(24)(i): "a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary"; • Section 5(24)(l): "any person who can control the composition of the board of directors or corresponding governing body of the corporate debtor". The terms "holding company", "subsidiary" and "associate company" are not separately defined in the IBC. Section 3(37) of the IBC therefore applies: words and expressions used b....
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....through shareholding, management rights, shareholders' agreements, voting agreements or otherwise. Detailed Analysis Step-down subsidiary status is sufficient under Section 5(24)(i) The appellate tribunal's principal conclusion was founded on the interlocking operation of Section 5(24)(i) of the IBC and Section 2(87) of the Companies Act. The claimant held 63% of an intermediate company, and that intermediate company held 51.2% of the corporate debtor. The tribunal held that the intermediate company was a subsidiary of the claimant and that the claimant, through that subsidiary, controlled the corporate debtor. The absence of direct shareholding in the corporate debtor did not assist the claimant. Explanation (a) to Sect....
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....ntment rights, removal rights, voting arrangements, management rights and the corporate chain may establish this capacity even if direct shareholding in the corporate debtor is absent. The approach is consistent with 2022 (7) TMI 661 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI. That decision examined contractual and governance rights and held that being in a position to exercise positive control over management or policy decisions could attract related-party status. Actual exercise of the control was not treated as an indispensable requirement where the arrangements placed the person in a position to exercise it. Control must be substantive, not merely formal The inquiry remains one of statutory substance.....
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....ct the creditor process from conflicts of interest. That authority recognises that a purported alteration of status cannot be used as a commercial contrivance to defeat the exclusion where the debt originated during a related-party relationship. The primary enquiry in a holding-company case remains the applicable statutory category and the factual corporate relationship; however, the CoC process must not be permitted to be manipulated through artificial restructuring. The contrasting importance of evidence of continuing relationship 2023 (11) TMI 173 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI - LB illustrates that related-party classification is evidence-sensitive. In that matter, the tribunal upheld exclusi....
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....iable evidence that any asserted share transfer, resignation, relinquishment of rights or restructuring was completed and legally effective before the relevant stage. • The Committee of Creditors should record the basis for exclusion carefully. Since Section 21(2) removes representation, participation and voting rights, the classification has direct consequences for CoC constitution and voting shares. • An entity may remain entitled to pursue the adjudication of its claim despite related-party classification; the immediate consequence considered here is exclusion from CoC participation under the first proviso to Section 21(2). Key Takeaways • Section 5(24)(i) expressly reaches group-company relation....