This is a neutral professional article. The judgment is analysed in the context of its factual background, issues framed, and conclusions reached by the Court.

2026 (7) TMI 250 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI

At a Glance

• A body corporate may be a related party of a corporate debtor under Section 5(24)(i) of the Insolvency and Bankruptcy Code, 2016 even where it holds no shares directly in the corporate debtor.
• The statutory inquiry 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 under the first proviso to Section 21(2).

Background & Context

The related-party exclusion in the corporate insolvency resolution process is directed at preserving the independence of the Committee of Creditors. The first proviso to Section 21(2) of the IBC states that a financial creditor which "is a related party of the corporate debtor" shall not have any right of representation, participation or voting in a Committee of Creditors meeting, subject to the stated statutory exception for a regulated financial creditor whose related-party status arises solely from specified debt-to-equity events.

The issue becomes particularly significant in multi-layer corporate groups. A claimant may assert that it is neither a shareholder nor a direct holding company of the corporate debtor. That assertion, by itself, does not resolve the enquiry. The IBC incorporates company-law concepts of holding and subsidiary relationships, and therefore requires examination of the complete ownership and control chain.

In 2026 (7) TMI 250 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI, the appellate tribunal considered whether an upstream entity, holding a majority interest in an intermediate entity which in turn held a majority interest in the corporate debtor, was a related party. The appellate tribunal held that the corporate debtor was the claimant's step-down subsidiary. It consequently upheld its classification as a related party under Section 5(24) of the IBC.

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 but not defined in the Code, and defined in the Companies Act, 2013, have the meanings assigned in that Act.

Holding company, subsidiary and indirect control

Section 2(46) of the Companies Act, 2013 defines a holding company as a company of which one or more other companies are subsidiary companies. Section 2(87) defines a subsidiary, in relation to its holding company, as a company in which the holding company either "controls the composition of the Board of Directors" or "exercises or controls more than one-half of the total voting power", either by itself or together with one or more subsidiaries.

Most importantly, Explanation (a) to Section 2(87) provides that a company is deemed to be a subsidiary of a holding company even where the requisite control is exercised "by another subsidiary company of the holding company". The statutory language expressly accommodates a layered corporate structure; it does not insist upon direct shareholding by the ultimate holding company in the corporate debtor.

Section 2(6) defines an associate company as one in which another company has significant influence but which is not its subsidiary. "Significant influence" means control of at least twenty per cent of total voting power, or control of or participation in business decisions under an agreement. Further, Section 2(27) provides that "control" includes the right to appoint a majority of directors or to control management or policy decisions, directly or indirectly, including 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 Section 2(87) deems a company to be a subsidiary even if the relevant control is exercised through another subsidiary of the holding company. The appellate tribunal therefore held that the corporate debtor was a step-down subsidiary and that the claimant was a related party within Section 5(24)(i). The conclusion was not dependent upon treating the claimant merely as an associate company or on proving a separate factual case of significant influence.

This construction gives operative content to the phrase in Section 5(24)(i), "a subsidiary of a holding company to which the corporate debtor is a subsidiary". It also prevents the related-party exclusion from being defeated merely because control is arranged through one or more intermediate entities.

Board control remains an independent statutory basis

The appellate tribunal also found no error in treating the claimant as a related party under Section 5(24)(l). The relevant corporate chart showed a common beneficial owner across the entities in the ownership chain. The tribunal considered that this structure supported the conclusion that control over the boards of the group entities, including the corporate debtor, could be exercised through the chain.

The Section 5(24)(l) test is framed in terms of capacity: whether a person "can control the composition" of the board. It is therefore distinct from, and may coexist with, the holding-subsidiary test under Section 5(24)(i). In an appropriate case, evidence concerning appointment 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. 2018 (10) TMI 312 - Supreme Court, while considering control in a different IBC setting, describes control as positive and proactive control, whether de jure or de facto, over management or policy decisions. It distinguishes such control from mere negative or protective rights. The decision also recognises that corporate structures may be examined to identify the persons who, in substance, control or act in concert.

For the purpose of Section 5(24)(i), however, once the statutory subsidiary relationship is established through Section 2(87), the related-party conclusion follows from the statutory relationship itself. A separate factual contest over every instance of management intervention is not necessary. Section 5(24)(l) may nevertheless provide an additional and independent basis where board-composition control is demonstrable.

Relevant point of time and past regulatory supervision

The appellate tribunal rejected the contention that a prior period during which the corporate debtor was under a revival or regulatory regime negated the upstream entity's related-party status. It held that control and shareholding before commencement of the CIRP are relevant to determination of related-party status. A past period of external supervision did not displace the admitted ownership structure preceding the CIRP.

2021 (2) TMI 91 - Supreme Court provides the complementary principle that the related-party exclusion under Section 21(2) must be purposively applied to protect 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 exclusion where the claimant's own claim form and corporate records continued to reflect related-party status, and the asserted share transfer had not been implemented or recorded. Conversely, it found that another entity could not be excluded merely on an alleged historical relationship where the record did not establish a continuing disqualifying relationship at the relevant point.

The practical lesson is that a bare assertion of separation from the corporate debtor will not suffice. Share registers, filings, claim forms, board rights, voting rights, agreements and the implementation of any alleged transfer or restructuring must be examined. In the case of an upstream holding entity, the statutory effect of the ownership chain must receive particular attention.

Practical Implications

• Resolution professionals should obtain a complete group structure chart, identify direct and indirect voting rights, and trace each intermediate entity between the claimant and the corporate debtor.
• The analysis should expressly apply Explanation (a) to Section 2(87) where control is exercised through a subsidiary. A direct-shareholding-only test is legally inadequate.
• Where Section 5(24)(l) is invoked, the record should identify the source of board-composition control, including appointment or removal rights, voting arrangements, constitutional documents and management agreements.
• Claimants asserting independence should furnish reliable 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 relationships and must be read with the Companies Act definitions imported through Section 3(37) of the IBC.
• Under Section 2(87), subsidiary status can arise through control held by another subsidiary of the holding company. This is the statutory basis for recognising a step-down subsidiary relationship.
• Direct ownership of shares in the corporate debtor is not a precondition for related-party status where indirect majority control through a subsidiary is established.
• Section 5(24)(l) independently covers a person capable of controlling board composition; common beneficial ownership and governance rights may be relevant evidentiary circumstances.
• The related-party exclusion in Section 21(2) protects the integrity of the Committee of Creditors by denying a related financial creditor representation, participation and voting rights.

Full Text:

2026 (7) TMI 250 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI