Does indirect control through a subsidiary qualify as 'related party' under Section 5(24)(i) of the IBC?

Yes. The NCLAT held that if a company holds majority shares in a subsidiary that controls the corporate debtor, it qualifies as a related party under Section 5(24)(i), as per Explanation (a) to Section 2(87) of the Companies Act, 2013. Direct ownership is not required.

Can a claim filed by a non-resident assignee include interest beyond the principal amount paid by the guarantor?

No. Under RBI Notification FEMA 29/RB/2000, the resident debtor’s reimbursement to a non-resident guarantor or its assignee is capped at the rupee equivalent of the amount paid by the guarantor. Any interest or additional amount is void and cannot be condoned by post-facto approval.

Can a security interest created in favor of resident lenders be transferred to a non-resident assignee without RBI permission?

No. Under Section 31 of FERA, 1973, a non-resident entity cannot acquire a security interest in immovable property in India without prior RBI permission. Subrogation under Section 140 of the Contract Act does not override this statutory requirement.

IBC Section 5(24)(i) | Step-Down Control Through Subsidiaries Constitutes Related Party Status : NCLAT

The National Company Law Appellate Tribunal has clarified critical aspects of related party status, secured creditor rights, and foreign exchange compliance under the Insolvency and Bankruptcy Code, 2016, in a landmark ruling arising from the CIRP of Incab Industries Ltd. The judgment sets binding precedents on corporate control structures, claim verification under FEMA, and the limits of CoC commercial wisdom.

Background & Facts

The Dispute

The Corporate Insolvency Resolution Process (CIRP) of Incab Industries Ltd. (CD), a defunct steel manufacturer, was initiated on 07.08.2019 following an application by operational creditor Jayanta Banerjee. The CD had been declared a sick company under the Sick Industrial Companies (Special Provisions) Act, 1985 on 04.04.2000 and remained under BIFR until its repeal on 01.12.2016. The CD had availed credit facilities from ICICI Bank, Citibank, and HSBC between 1997 and 1999. Leader Universal Holdings Berhad (Leader Berhad), a Malaysian company, provided corporate guarantees for these facilities. Upon default, Leader Berhad paid ICICI Bank and Citibank a total of Rs.85,79,26,944/- between April 2000 and June 2001. Leader Cable Industry Berhad, a subsidiary, paid US$3.75 million to HSBC on 12.09.2000. On 08.03.2007, Leader Berhad assigned all its subrogated rights against the CD to Tropical Ventures Company Ltd. (Tropical), a Mauritius-based company, for a consideration of US$1. Tropical filed a claim of Rs.21,52,84,33,946.87 in Form-C as a financial creditor, including Rs.1,531 crores in interest.

Key Facts

Leader Berhad held 51.2% direct and 10% indirect (via Satyam Incab Holdings Ltd.) shareholding in the CD.
Tropical held 63% shareholding in Leader Universal (Mauritius), which in turn held 51.2% in the CD.
Naresh Lakhmichand Asrani was the ultimate beneficial owner of Tropical, Leader Universal (Mauritius), and indirectly, the CD.
The CD had registered charges in favor of ICICI, Citibank, and HSBC over its assets between 1998 and 1999.
The assignment deed dated 08.03.2007 did not mention transfer of security interests.
The Reserve Bank of India (RBI) issued Notification FEMA 29/RB/2000 dated 26.09.2000, capping reimbursement by resident debtors to non-resident guarantors at the rupee equivalent of the amount paid.
The 22nd Committee of Creditors (CoC) meeting on 23.06.2022 approved a resolution plan by Vedanta Ltd. (SRA) with 99.37% voting share.
The resolution plan allocated Rs.294.91 crores to Tropical, to be held in an interest-bearing escrow account pending adjudication of its claim.

Procedural History

04.04.2000: CD declared sick under SICA Act.
08.03.2007: Leader Berhad executed Deed of Assignment in favor of Tropical.
01.12.2016: SICA Act repealed; CD exited BIFR.
07.08.2019: CIRP initiated by operational creditor.
07.02.2020: NCLT ordered liquidation.
04.06.2021: NCLAT set aside liquidation order and reinstated CIRP; Pankaj Kumar Tibrewal appointed Interim RP.
17.11.2021: RP admitted Tropical’s claim as related party; part classified as unsecured.
10.12.2021: RP revised claim admission to Rs.19,90,63,12,342/-.
08.01.2025: NCLT dismissed Tropical’s IA (IB) No.84/KB/2022 challenging related party status; directed RP to re-verify claim under FEMA and RBI Notification.
03.12.2025: NCLT approved Vedanta’s resolution plan; dismissed Pegasus’s IA No.1511/KB/2025 challenging claim admission.
08.01.2025: NCLT dismissed IA (IB) No.84/KB/2022 filed by Tropical.
28.03.2023: Company Appeal (AT) (Ins.) No.662 of 2025 filed by Tropical against order dated 08.01.2025.
03.12.2025: NCLT order dated 03.12.2025 passed in IA No.1511/KB/2025 (Pegasus) and IA No.646/KB/2022 (SRA).
15.05.2026: Final hearing concluded before NCLAT.
30.06.2026: Judgment delivered by NCLAT.

The Parties' Positions

Tropical: Argued it was not a related party because it held no direct shares in the CD; claimed subrogation rights under Section 140 of the Indian Contract Act; contended that FEMA 29/2000 was inapplicable as the guarantee was executed pre-2000 and payment was made by a non-resident to resident creditors, not reimbursement by the debtor.

Pegasus: Contended Tropical was a step-down subsidiary under Section 5(24)(i) via its control over Leader Universal (Mauritius); challenged claim admission as violative of FEMA 29/2000 and FERA; argued no security interest was transferred; claimed interest component of Rs.1,531 crores was illegal.

RP: Supported related party status; acknowledged administrative role in claim verification but complied with NCLT directions.

SRA: Supported RP’s position; emphasized commercial wisdom of CoC and finality of resolution plan.

Relief Sought

Tropical sought declaration that it was not a related party and that its claim should be admitted as secured creditor.
Pegasus sought rejection of Tropical’s claim in full, citing FEMA violations and lack of security interest.
Tropical sought partial setting aside of the resolution plan approval order to prevent allocation of funds pending adjudication.
Pegasus sought modification of claim amount to Rs.85,79,26,944/- (principal only) and exclusion of interest.

The Legal Issue

The central questions were: (1) Whether a company holding majority shares in a subsidiary that controls the corporate debtor qualifies as a 'related party' under Section 5(24)(i) of the IBC? (2) Whether a claim filed by an assignee of a non-resident guarantor can include interest beyond the principal amount paid, in light of RBI Notification FEMA 29/RB/2000? (3) Whether a security interest created in favor of resident lenders can be transferred to a non-resident assignee without RBI permission under FERA?

Arguments Presented

For the Appellant (Tropical)

Tropical argued that it did not exercise direct or indirect control over the CD under Section 2(27) of the Companies Act, 2013, as the CD was under BIFR until 2016 and thus not under the de facto control of Naresh Asrani or Tropical. It relied on Economic Transport Organization v. Charan Spinning Mills to assert that assignment of debt included subrogation rights under Sections 140 and 141 of the Indian Contract Act, 1872. It contended that the guarantee was executed in 1997 - 1999, prior to FEMA’s enactment, and that the payment was made by the guarantor directly to the resident creditors, not as reimbursement by the debtor, rendering FEMA 29/2000 inapplicable. It further argued that FEMA is regulatory, not prohibitory, and that post-facto RBI approval could cure any violation, citing Vijay Karia v. Prysmian Cavi.

For the Respondent (Pegasus and RP)

Pegasus contended that Tropical was a step-down holding company under Section 5(24)(i) because it controlled Leader Universal (Mauritius), which held 51.2% in the CD, satisfying the definition of subsidiary under Section 2(87) of the Companies Act, 2013. It relied on K.V. Jayaprakash v. SBI to argue that a secured creditor must have a security interest created in its favor, which was absent here. It emphasized that FEMA 29/2000 explicitly capped reimbursement at the rupee equivalent of the amount paid by the non-resident guarantor, and that interest beyond Rs.85,79,26,944/- was illegal. It further argued that FERA Section 31 prohibited non-residents from acquiring security interests in immovable property without RBI permission, and that no such permission was obtained. The RP maintained its role was administrative and that it had complied with NCLT directions.

The Court's Analysis

The NCLAT undertook a rigorous statutory interpretation of Section 5(24)(i) of the IBC, read with Section 2(87) of the Companies Act, 2013. The Court held that the definition of subsidiary includes indirect control through another subsidiary, as clarified by Explanation (a) to Section 2(87). Tropical’s 63% stake in Leader Universal (Mauritius), which held 51.2% in the CD, established a step-down subsidiary relationship. The Court rejected the argument that BIFR control negated this, noting that the relevant period for determining related party status is the commencement of CIRP on 07.08.2019, not the period of BIFR administration.

"Tropical having 63% voting share in Leader Universal (Mauritius), which is, thus, clearly subsidiary of the Tropical, which has control over the CD. Thus, the Appellant is 'related party' to the CD and the CD being subsidiary within the meaning of Section 2(87) of the Companies Act, 2013."

On the claim amount, the Court examined RBI Notification FEMA 29/RB/2000 dated 26.09.2000. It held that the notification applied because the claim was filed during CIRP, when the notification was in force, and the transaction involved a resident debtor’s liability to a non-resident assignee. The proviso to Paragraph 2A explicitly capped reimbursement at the rupee equivalent of the amount paid by the non-resident guarantor. The Court rejected the argument that the payment was not reimbursement, noting that the debt owed by the CD to Leader Berhad arose from the latter’s discharge of the CD’s liability to resident creditors. The claim of Rs.1,531 crores in interest was held to be in direct violation of the notification.

"When law prohibits a particular thing to be done, the said cannot be allowed to be done by any prior or subsequent permission. FEMA Notification does not contemplate any permission or any exception to the above requirement of law."

Regarding security interest, the Court held that FERA Section 31 prohibited non-resident entities from acquiring security interests in immovable property without RBI permission. Since no such permission was obtained, and the assignment deed did not transfer security interests, Tropical could not be a secured creditor with respect to immovable assets of the CD. The Court distinguished between subrogation of debt rights and transfer of security interests, citing Amrit Lal Goverdhan Lalan v. SBT and K.V. Jayaprakash v. SBI.

On the resolution plan, the Court affirmed the commercial wisdom of the CoC under Torrent Power v. Ashish Arjunkumar Rathi, but held that the plan’s approval was subject to the outcome of these appeals. The allocation to Tropical was to be adjusted based on the revised claim amount and secured status.

The Verdict

Pegasus succeeded in part. The NCLAT held that Tropical is a related party under Section 5(24)(i) of the IBC. The claim of Tropical is limited to Rs.85,79,26,944/-, the principal amount paid by Leader Berhad to ICICI and Citibank. Tropical is not a secured creditor with respect to immovable properties of the CD. The resolution plan approved on 03.12.2025 is affirmed, subject to adjustment of payouts based on this judgment. The Monitoring Committee shall re-distribute the amount allocated to Tropical within 30 days, considering only the admitted claim of Rs.85,79,26,944/- and excluding any interest or security interest over immovable assets. Parties shall bear their own costs.

What This Means For Similar Cases

Practitioners must now analyze indirect ownership chains under Section 5(24)(i) - control via a subsidiary of a subsidiary qualifies as related party status.
The BIFR or regulatory oversight of a corporate debtor does not negate related party status if the control structure existed at CIRP commencement.
Corporate structures with multiple layers of holding companies must be mapped to assess potential related party exposure in CIRPs.

FEMA Compliance Is Non-Negotiable in Claim Admissions

Any claim involving reimbursement by a resident debtor to a non-resident assignee must be capped at the rupee equivalent of the amount paid by the non-resident guarantor under FEMA 29/2000.
Interest, penalties, or mark-ups beyond the principal amount paid are void and cannot be cured by post-facto RBI approval.
RP and NCLT must independently verify compliance with FEMA and RBI notifications during claim verification - regulatory violations are not merely procedural.

Security Interest Cannot Be Transferred Without RBI Permission

A non-resident assignee of a debt cannot claim secured creditor status over immovable property unless RBI permission was obtained under FERA/FEMA.
Subrogation under Section 140 of the Contract Act does not automatically transfer security interests - a separate, compliant transfer mechanism is required.
RP must verify registration of charges and RBI permissions before admitting claims as secured, especially where foreign entities are involved.

IBC Section 5(24)(i) | Step-Down Control Through Subsidiaries Constitutes Related Party Status : NCLAT