Lender rights and related party conundrum

Much has been reported about the Supreme Court’s decision in ECL Finance Ltd. and Anr. v. Abhinav Mukherjee of October 2026 (ECL Judgment) as it has questioned the fundamentals of lender protection rights to treat lenders as a related party of the borrower for the purposes of the Insolvency and Bankruptcy Code, 2016. While the facts are similar to a typical financing, the relevant issue before the Supreme Court was whether ECL qualified as a related party under Section 5(24)(m)(i) of the IBC. The Supreme Court held that the rights available to ECL under the financing documents extended beyond ordinary lender protections and amounted to participation in the policy-making process of the corporate debtor and it upheld the exclusion of ECL and ITSL (as lenders) from the committee of creditors while observing that ECL exercised “all-pervasive control” which “cannot be said to be a mere restrictive or negative control." Further, applying the principle laid down in Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., the Supreme Court disregarded the assignment of the underlying debt after the commencement of the Corporate Insolvency Resolution Process.

The judgment raises a fundamental question of financing principles as a lender can overnight become a related party and hence be subject to zero participation in CIRP and nil payout under a resolution plan under IBC. This is not to say that the money is not owed. Banks, NBFCs, AIFs, FPIs, private credit funds, and even unrelated corporate entities granting intercorporate loans have each gone back to the drawing board to assess the implications of the ECL Judgment, and through this article we hope to lay down some general principles.

A significant feature of the ECL Judgment is the distinction it draws between control and participation in policy-making. The Court referred to ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta, in which it had held that “control” under Section 29A(c) and (g) of the IBC denotes positive and proactive control over a company’s management or policy decisions, and that a mere ability to block or veto decisions does not, by itself, amount to control. However, in the ECL Judgement, the Supreme Court clarified that the enquiry for related party characterisation under Section 5(24)(m)(i) of the IBC is materially different. The threshold for treating a financial creditor as a related party of the corporate debtor under Section 5(24)(m)(i) of the IBC is “a tad lesser” and a “role of navigation” by a lender in determining policy and channeling business interests may suffice.

A lender therefore need not be in the “driving seat” running the company or managing its day-to-day affairs of the corporate debtor, to be its related party. If the rights enable a lender to influence how the corporate debtor conducts its business or takes key decisions, such lender may fall within the ambit of related party classification.

While deciding on the appeals against the NCLAT’s decision, the Supreme Court considered the articles of association, debenture trust deed, facility agreement, sanction letter, power of attorney and other financing documents together, rather than examining individual rights in isolation. Those rights included the appointment of a lender nominee director on the board of security providers upon an event of default, lender approval to resolve board and shareholder deadlocks, approval of construction budgets and control over the release of project cash flows from escrow accounts. Additionally, ECL could also appoint a board observer, restrict the removal of key managerial personnel, require changes in management if project milestones were missed, appoint consultants to review the obligors’ operations and exercise powers over construction and sales, with retaining substantial control over the revenues collected in the escrow account.

When viewed individually, some of the aforesaid rights are typical in any secured project financing, but the Supreme Court considered their cumulative effect and concluded that ECL’s role extended well beyond that of an ordinary lender. It was also not persuaded by the fact that several of these rights had never been exercised until occurrence of an event of default, indicating that the existence of such rights itself was sufficient for the Supreme Court to assess the nature and extent of ECL’s involvement.

The ECL Judgment also raises practical questions specifically for regulated lenders and debenture trustees. RBI and SEBI frameworks require its regulated entities to, among other things, monitor end-use of funds, track covenant compliance, inspect secured assets and oversee the creation and maintenance of security. There is also an inherent obligation to identify incipient stress, which it can do only through covenant monitoring.

This raises the question of balancing the rights. A question which a lender should ask is what all can it get from the Borrower and balance that directly against what is it that the lender can do with that information. This balance should be tested solely against the principle of securing the financing and must not go into commercial judgement of the Borrower.

It is a fact that governance and monitoring rights are a commercial necessity and till the time the principles of the ECL Judgment remain the prevailing law, lenders can probably consider going back to the drawing board for their documentation and revisit their position with the following indicative broad examples:

• Can have: Appoint one board director, appoint one observer, obtain progress reports, verify expenditure, monitor end-use, require collections to flow through designated escrow accounts.  

• Closely consider: Consent for business plan especially for new line of business, common director / management / observer on the board, appoint consultants, restrict other dealings like raising of capital / financings, monitor line of business, appoint signatories to bank account.

• Avoid: Appoint more than one or majority directors, approve business budgets, direct the deployment of funds, influence key operational appointments, cast the deciding vote in board deadlocks.

Key takeaway is that lender protection rights cannot be viewed solely through the lens of financing and security. As the rights negotiated to safeguard a lender’s exposure may, under IBC, result in the lender losing its voice in the CIRP that determines its recovery, a lender must balance its objectives with the rights. It is now more than important that the basket of lender rights (individually and collectively) are assessed against the risk of being characterised as a related party at the transaction structuring stage itself and the examples above are intended as a quick guidance as lenders move towards documentation.

About the authors: Veena Sivaramakrishnan is a Partner and Co-Headof Banking & Finance Practice, and Yash Kahandole is a Principal Associate at Shardul Amarchand Mangaldas & Co.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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