Related Parties explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Civil Appeal No. 2842 of 2020 answers two connected questions — whether a collusive arrangement can create financial debt, and whether shedding related party status shortly before a CIRP buys a seat in the committee of creditors.
How the appeal arose
The appeals came from an NCLAT judgment of 27 January 2020, which had dismissed an appeal by AAA Landmark Private Limited and Spade Financial Services Private Limited. The NCLAT had upheld the NCLT's ruling that both were related parties of AKME Projects Limited, the corporate debtor, and were therefore excluded from the committee of creditors.
The three questions
- Whether Spade and AAA were financial creditors of the corporate debtor.
- Whether they were related parties of the corporate debtor.
- Whether they had to be excluded from the committee of creditors.
The Supreme Court's findings
- Financial creditor status. The transactions between Spade, AAA and AKME Projects were collusive in nature, which disqualified them as financial creditors under section 5(8). The NCLAT's characterisation of them as financial creditors was erroneous.
- Related party determination. Both entities were related parties within section 5(24), and that classification was crucial to their exclusion.
- Exclusion from the CoC. The exclusion was upheld, on the footing that collusive transactions undermine legitimate creditor claims and warrant exclusion from decision-making bodies in insolvency proceedings.
The first proviso to section 21(2) excludes related parties from the committee of creditors, and its default rule is that the creditor must be a related party in praesenti — related now, at the time the committee is constituted.
Read literally, that invites a simple manoeuvre: unwind the relationship shortly before the CIRP begins, and the debt walks into the committee clean. The Court closed it:
"While the default rule under the first proviso to Section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder."
So the test is not merely whether the relationship exists today, but why it does not.
Two independent grounds of exclusion
| Ground | Provision | Effect |
|---|---|---|
| Collusive transaction | Section 5(8) | The debt is not financial debt at all, so there is no financial creditor |
| Related party | Section 5(24) with the first proviso to section 21(2) | A genuine financial creditor is debarred from the committee |
The distinction matters. A related party may hold a perfectly genuine financial debt — it simply cannot vote on the plan. A collusive arrangement fails one step earlier: there was never a financial debt to begin with, and the claim itself is bad.
Why related parties are kept out of the committee
Every consequential decision in a CIRP is taken by voting share — approval of the plan, replacement of the professional, withdrawal under section 12A. A creditor connected to the promoters does not vote on the commercial merits of the plan; it votes on what suits the promoters.
Admitting such a creditor does not merely add a voice. It dilutes the voting power of every independent creditor proportionately, which is the reasoning the NCLAT applied to assigned debt in Pankaj Yadav and that the Supreme Court applies here to collusive and formerly related lending.
Practical points for a resolution professional
- Test each financial claim for collusiveness before testing it for related party status — the two are separate enquiries.
- Where a relationship was recently unwound, examine when and why; timing close to the CIRP is the fact the Court cared about.
- Examine the flow of funds and the commercial rationale, not merely the loan documentation.
- Record the reasons for including or excluding each claimant from the committee.
Common mistakes
- Admitting a creditor to the committee because the relationship ended before the commencement date.
- Treating collusive lending as a related party question rather than as a failure of section 5(8).
- Accepting loan documents at face value where the parties are connected.
- Assuming that related parties keep their voting rights if their claim is genuine.