ECL Finance loses creditor rights; Why Supreme Court pushed ECL Finance out of CoC? Explained

New Delhi: ECL Finance has been excluded from the Committee of Creditors (CoC) under the Insolvency and Bankruptcy Code (IBC) in a landmark Supreme Court of India judgement. The apex court has dismissed the appeals filed by ECL Finance and IDBI Trusteeship Services (ITSL), making it clear that if a lending company interferes in the policy decisions of the borrower, it cannot be considered just a lender. Instead, it will be treated as a "related party".

The Supreme Court has raised these serious questions against ECL Finance Limited. Here is how the actions of ECL Finance Limited came to light in the Supreme Court:

A Housing Project Launched to Deceive Homebuyers

What is the actual purpose of building a housing project? It is meant to provide homes to people and generate profits for the real estate company. However, this specific housing project was started with the intent to deceive homebuyers and to merely secure loans from financial companies.

How the Game of Fund Diversion Began

• The Project Setup: In 2016, a company named Saha Infratech was developing a real estate project in Greater Noida named 'Project Encore', which was later renamed 'Megdootam Encore'.
• The Debentures: A plan was made in 2016 to issue debentures worth ₹160 crore for this project. Ultimately, only ₹110 crore worth of debentures were issued, all of which were purchased by ECL Finance.
• The Guarantor: Palm Developers acted as the guarantor in this deal. This meant that if Saha Infratech failed to repay the money, the liability would fall on Palm Developers.
• Additional Credit: In 2017, ECL Finance extended another credit facility of ₹90 crore to Saha Infratech, with Palm Developers acting as the guarantor again. This is where the game of money transfers and fund diversion started.

Shocking Disclosures in the Forensic Audit

A forensic audit report presented before the Supreme Court made shocking disclosures. According to the report:
• Palm Developers, the corporate guarantor of Saha Infratech, was used as a medium to divert money from Saha Infratech to two other companies.
• These two companies belonged to the promoters of Palm Developers.
• The forensic report revealed that ECL Finance held ultimate control over both of these companies.
Following this, the situation took a surprising turn. In 2020, Palm Developers went bankrupt. ECL Finance and its debenture trustee jointly filed a claim of around ₹270 crore and inducted themselves into the Committee of Creditors (CoC)—the committee that decides the future of the bankrupt company.
As per the rules, the CoC can only consist of lenders who are not "related parties" (insiders) to the company. This is where the layers of ECL Finance Limited's actions began to unravel.

ECL Had More Than Just the Right to Recover Money

When the Supreme Court examined the documents related to the insolvency process of Palm Developers and ECL Finance, the findings were startling. ECL did not just possess the right to recover its money.
The documents revealed that ECL Finance held massive power, including:
• The right to appoint directors to the company.
• The right to take the final call on any deadlock within the board.
• The authority to approve the quarterly budgets.
• Veto power against the removal of any management official.
• Direct control over the bank accounts of the company.

Supreme Court Upholds the NCLT Order

After examining these documents, the National Company Law Tribunal (NCLT) had previously excluded ECL Finance Limited from the Committee of Creditors (CoC).
Recently, the Supreme Court upheld the NCLT order, confirming the decision to keep ECL Finance out of the CoC.

The Supreme Court passed a strict remark stating that a company interfering in the business operations of a borrower cannot be treated as an ordinary external lender. Instead, it will be considered a "related party" (insider). Therefore, it has no right to sit on that committee, even if the company owes it money.

Found Guilty of Financial Irregularities

This Supreme Court order is a major setback for ECL Finance. Notably, this is not the first blow. The Reserve Bank of India (RBI) had also penalized ECL Finance earlier.

In May 2024, the RBI imposed business restrictions on ECL Finance and its group company, Edelweiss ARC. During its inspection, the RBI found both Edelweiss companies guilty of multiple irregularities concerning loan accounts.

(Report by: Parivesh Vatsyayan, Special Investigation Team, Zee Media)