A related-party lender can hold a valid financial debt and still be kept out of the Committee of Creditors (CoC). These are two separate questions. Claim admission decides whether money is owed as financial debt. Section 21(2) of the Insolvency and Bankruptcy Code, 2016 decides whether that creditor may be represented, participate or vote in the CoC. A resolution professional (RP) who merges the two in one line of the claims register invites a challenge later.
This guide sets out the statutory test, the one exception for regulated lenders, the Supreme Court's anti-circumvention reading in Phoenix ARC, and what the Insolvency and Bankruptcy Code (Amendment) Act, 2026 has and has not changed.
The rule in section 21(2)
Under section 21(2) of the Insolvency and Bankruptcy Code, 2016, the CoC comprises all financial creditors of the corporate debtor. The first proviso then says that a financial creditor that is a related party of the corporate debtor shall not have any right of representation, participation or voting in a meeting of the CoC.
The second proviso carves out one exception. The first proviso does not apply to a financial creditor regulated by a financial sector regulator if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, or completion of such transactions as may be prescribed, prior to the insolvency commencement date.
The exclusion removes the vote, not the claim. The related-party creditor's financial debt, if admitted, is still part of the claims and is dealt with under the resolution plan or in liquidation.
Four questions to settle for every financial creditor
| Question | Evidence to collect | Why it matters |
|---|---|---|
| 1. Is the debt a financial debt? | Facility agreement, disbursement trail, time-value terms, security, claim verification | Related-party status does not make a debt financial, and a collusive arrangement may not be financial debt at all |
| 2. Is the creditor a related party under section 5(24)? | Shareholding registers, director lists, group chart, control rights, advice and instruction patterns | Section 5(24) has thirteen separate limbs; any one is enough |
| 3. Does the regulated-creditor exception apply? | Identity of the regulator, the exact conversion or substitution transaction, its date | The exception applies only where that transaction is the sole reason for the relationship |
| 4. Was the relationship shed or the debt moved to get around the bar? | Chronology of resignations, share transfers, assignments, default and filing; commercial reasons; consideration | Phoenix ARC looks at substance and timing, not the latest shareholding alone |
Who counts as a related party under section 5(24)
Section 5(24) of the Code lists the persons who are related parties in relation to a corporate debtor. They are:
- a director or partner of the corporate debtor, or a relative of either;
- a key managerial personnel of the corporate debtor, or a relative;
- an LLP or partnership firm in which a director, partner or manager of the corporate debtor, or a relative, is a partner;
- a private company in which a director, partner or manager of the corporate debtor is a director and, with relatives, holds more than 2% of share capital;
- a public company in which such a person is a director and, with relatives, holds more than 2% of paid-up share capital;
- a body corporate whose board, managing director or manager is accustomed to act on the advice, directions or instructions of a director, partner or manager of the corporate debtor;
- an LLP or partnership firm whose partners or employees are accustomed to act on such advice or directions;
- any person on whose advice, directions or instructions a director, partner or manager of the corporate debtor is accustomed to act;
- a holding, subsidiary or associate company of the corporate debtor, or a subsidiary of a holding company of which the corporate debtor is a subsidiary;
- any person who controls more than 20% of voting rights in the corporate debtor through ownership or a voting agreement;
- any person in whom the corporate debtor controls more than 20% of voting rights;
- any person who can control the composition of the board or corresponding governing body of the corporate debtor;
- any person associated with the corporate debtor through participation in policy making, having more than two common directors, interchange of managerial personnel, or provision of essential technical information.
Because the limbs are independent, record which limb applies, on which date, and on what document. A dated relationship chart covering the dates of lending, default, commencement and CoC constitution is more useful than a present-day shareholding pattern.
How Phoenix ARC reads the proviso
In Phoenix ARC Private Limited v Spade Financial Services Limited (Civil Appeals 2842 and 3063 of 2020), the Supreme Court dealt with two creditors, Spade and AAA, whose claims arose from dealings with the corporate debtor.
First, on financial debt, the Court upheld findings that the arrangements were collusive. For Spade, it noted that the memorandum of understanding was signed about two years after the transactions began, recorded interest at 12% against the 24% stated elsewhere, no interest was actually paid, there was no board resolution and no charge was registered. The Court concluded that since the commercial arrangements were collusive, they did not constitute financial debt, and Spade and AAA were not financial creditors.
Second, on the related-party bar, the Court considered whether the word "is" in the first proviso looks only at the present moment. It read the proviso purposively. The Code's objects, it said, are best served when the CIRP is driven by external creditors so that the CoC is not sabotaged by related parties of the corporate debtor. A creditor that was a related party and sheds that status in order to enter the CoC and defeat the proviso cannot escape the bar by that step. At the same time, a creditor that was once related is not automatically excluded for ever; the question is whether the change in status was made to circumvent the exclusion.
For an RP, this means timing and purpose need evidence. A change close to default is a signal, not proof. The file should show the commercial reason for the change, the consideration, who took the decision, and whether influence continued after the formal change.
What the 2026 amendment changed
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026, 6 April 2026) makes two changes that touch this topic. Under notification S.O. 2625(E) dated 22 May 2026, the relevant provisions, including sections 2 to 6 and 8 to 33 of the Amendment Act, came into force on 26 May 2026.
- Voting share, section 5(28): the definition now ends with the words "to the members of the committee of creditors who are eligible to vote". The denominator for voting share is the financial debt owed to members who can vote, which means excluded related-party debt does not dilute the percentages.
- CoC in liquidation, new section 21(11): where liquidation is initiated under Chapter III, the CoC constituted under section 21 also supervises the liquidator's conduct of the liquidation. The Board may specify other classes of creditors who may attend such meetings without a right to vote. The Explanation applies this to liquidations started after commencement and to ongoing ones where the liquidator has not yet applied under section 54.
The Amendment Act does not change the first or second proviso to section 21(2) or the definition of related party in section 5(24). A related-party financial creditor that was excluded before 26 May 2026 remains excluded, and since the CoC now continues into liquidation, the exclusion now carries into that stage as well.
Worked examples
Example 1: holding company loan and the voting arithmetic
Admitted financial debt of a corporate debtor is ₹100 crore: Bank A ₹60 crore, Bank B ₹25 crore and H Ltd, its holding company, ₹15 crore. H Ltd is a related party under the holding-company limb. Its claim is admitted as financial debt but it has no representation, participation or vote.
Under the amended section 5(28), voting share is measured only against debt owed to members eligible to vote, ₹85 crore. Bank A holds 70.59% and Bank B 29.41%. A resolution plan needs approval by not less than 66% of voting share under section 30(4), so Bank A can carry it alone. If H Ltd had wrongly been admitted to vote, the shares would be 60%, 25% and 15%, and Bank A could not reach 66% without one of the others. A single wrong eligibility call changes who controls the outcome, which is why the reasoning must be on file.
Example 2: regulated lender after debt conversion
A bank converted part of its stressed loan into equity before the insolvency commencement date and now holds more than 20% of voting rights, making it a related party. If the conversion is the only reason it is a related party, the second proviso lets it keep CoC rights. If the bank also has a nominee director who controls board composition, or a separate management relationship, the relationship is no longer "solely on account of" the conversion, and the exception fails.
Example 3: assignment shortly before filing
A promoter-linked lender assigns its loan to a newly formed vehicle a few weeks before a creditor files under section 7. The vehicle's shareholding looks unrelated. Following Phoenix ARC, the RP should examine who funded the assignment, who controls the vehicle's decisions, whether consideration was paid at market value, and why the assignment happened when it did. The assignment deed alone does not settle eligibility.
Decision record checklist for the resolution professional
- Keep the financial-debt conclusion and the CoC-eligibility conclusion as separate findings.
- Cite the exact limb of section 5(24) relied on and attach the supporting document.
- Record relationship status on each relevant date, not only on the date of the note.
- For the regulated-creditor exception, record the regulator, the conversion or substitution transaction, its date, and why it is the sole cause of the relationship.
- For past relationships and assignments, preserve the full chronology and the commercial reasons given.
- State the consequence expressly: claim treatment, representation, participation, voting, and the voting-share denominator under the amended section 5(28).
- Remember that the CoC continues into liquidation under section 21(11), so the same eligibility record will be used there.
- Revisit the conclusion if new evidence of control, assignment or relationship emerges.
Updated on 27 September 2026: retitled, added links to the Code, the Phoenix ARC judgment, the IBC (Amendment) Act, 2026 and its commencement notification, set out all thirteen related-party limbs, added the voting-share arithmetic under the amended section 5(28), and confirmed the 26 May 2026 commencement.
