Tribunal finds nominee director's family shareholding exceeds statutory 2% limit under IBC Section 5(24)(d); Interim Resolution Professional barred from unilateral reclassification of creditor post-CoC constitution.
In a significant decision dated September 15, 2026, the National Company Law Tribunal (NCLT), Kolkata Bench, adjudicated the classification dispute of Abinandan Holdings Private Limited (AHPL) as a "Related Party Financial Creditor" in the Corporate Insolvency Resolution Process (CIRP) of Howrah Mills Company Limited (HMCL). The judgment clarifies the application of Section 5(24)(d) of the Insolvency and Bankruptcy Code, 2016 (IBC) regarding related party definitions and limits the powers of the Interim Resolution Professional (IRP) in reclassifying creditors after the constitution of the Committee of Creditors (CoC).
Background:
AHPL, a Non-Deposit Taking Non-Banking Financial Company registered with the Reserve Bank of India, had entered into multiple Memoranda of Understanding with HMCL for sale and financing arrangements. Pursuant to these, Mr. Prashant Damani was appointed as a nominee director on the board of HMCL. After the commencement of CIRP against HMCL, AHPL submitted its financial debt claim, which was initially admitted but later classified by the IRP as a related party financial creditor following objections and a due diligence investigation.
Key Issue:
AHPL challenged this classification, contending that Mr. Damani's role was limited to nominee directorship without control over HMCL, and that his personal shareholding in AHPL was only 1.01%, below the 2% threshold prescribed under Section 5(24)(d) of the IBC for related party status. AHPL argued that such classification unfairly affected its voting rights in the CoC.
Tribunal's Analysis:
The NCLT scrutinized the statutory definition of related party under Section 5(24)(d), which applies when a director of the corporate debtor is also a director in a private company and holds, along with relatives, more than 2% of its share capital. It was undisputed that Mr. Damani was a director in both HMCL and AHPL. The tribunal then examined AHPL's own shareholding records, which revealed that along with Mr. Damani's personal 1.01% shares, there were significant holdings by his relatives, including 12% by Prashant Damani (HUF), 10.06% by Deo Kishan Das Damani (HUF), and 9.06% by the estate of Deo Kishan Das Damani, his father. Collectively, these holdings exceeded 32%, far above the statutory 2% threshold.
The tribunal rejected AHPL's attempt to isolate Mr. Damani's personal shareholding and held that the aggregate family shareholding must be considered, thus squarely bringing AHPL within the "related party" ambit under Section 5(24)(d). The mere nomination of Mr. Damani as director, even with contractual monitoring rights, did not negate this status.
Further, the tribunal distinguished this case from precedents involving Sections 5(24)(h) and 5(24)(m)(i), which require proof of actual control or directions in corporate affairs and where nominee directorship alone was insufficient for related party classification. Here, the shareholding criterion was determinative.
On procedural grounds, the tribunal noted that while the due diligence report suggested further verification, the material facts-shareholding records and the 2020 MOU-were already on record and sufficient for determination. Hence, any procedural gaps did not vitiate the substantive conclusion.
Importantly, the tribunal emphasized the limited role of the IRP. While the IRP is responsible for verification and constitution of the CoC, it does not have adjudicatory powers to conclusively determine disputed legal status of creditors or unilaterally reclassify them after the CoC is formed. The IRP's attempt to alter AHPL's classification and voting rights post-CoC constitution was held to be beyond the scope of authority and should have been referred to the Adjudicating Authority.
Conclusion:
The NCLT dismissed AHPL's application challenging its classification as a Related Party Financial Creditor. The tribunal affirmed that AHPL falls within the definition under Section 5(24)(d) of the IBC due to combined shareholding of Mr. Damani and relatives exceeding 2%. The IRP's unilateral reclassification post-CoC constitution was held improper, underscoring the need for judicial intervention in such disputes.
This ruling reinforces the strict interpretation of related party provisions under the IBC and delineates the administrative versus adjudicatory roles within the CIRP framework, thereby ensuring fairness and legal propriety in creditor classification and voting rights.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 - Related party financial creditor - Private company in which director of corporate debtor is also director and holds along with relatives more than 2% share capital falls within Section 5(24)(d) - Nominee directorship by itself may not attract Sections 5(24)(h) or 5(24)(m)(i), but shareholding test under Section 5(24)(d) is determinative - IRP cannot, after constitution of CoC, unilaterally reclassify creditor and alter voting composition without approaching Adjudicating Authority.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Section 5(24)(d), Section 5(24)(h), Section 5(24)(m)(i), Section 18, Section 21; CIRP Regulations 2016 Regulations 12, 13, 14.
