Recovering an Intra-Group Loan When a Subsidiary Enters Insolvency

A parent company that has funded a subsidiary now under a corporate insolvency resolution process is a related-party financial creditor with no right of representation, participation or voting in the committee of creditors under the first proviso to section 21(2) of the Insolvency and Bankruptcy Code, 2016. The exclusion follows from the lender's relationship with the debtor, not the debt's quality, and does not bar the parent from filing and having its claim admitted. This post explains when a group lender can shed related-party status, how intra-group debt ranks under section 53 in liquidation, and how funding should be documented to survive an avoidance challenge.

How Section 5(24) Catches a Group Lender

Section 5(24) of the Code defines a related party by reference to relationships rather than transactions. It captures a holding company, a subsidiary, an associate company and a joint venture; a person controlling more than twenty per cent of voting rights; directors, key managerial personnel and their relatives; a person on whose advice a director or manager is accustomed to act; and firms or limited liability partnerships in which a director, partner or manager holds more than twenty per cent.

Because the test is relational, the quality of the loan does not affect it. Funding may carry a commercial rate, a properly constituted board sanction and a registered charge, and the lender remains a related party. Tribunals read the categories functionally, so a treasury company sitting two levels away from the debtor should assume it is caught.

Does Ceasing to Be a Related Party Before Admission Help?

Group counsel ask this more than any other question, and the Supreme Court answered it in Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. [(2021) 3 SCC 475], decided on 1 February 2021. The Court held that the first proviso is directed at the relationship and not at the debt, so the words "is a related party" carry their present-tense sense as the default rule: a creditor who is not a related party in praesenti is not debarred from the committee.

The qualification the Court added decides most real cases. A financial creditor that shed the related-party label in order to circumvent the first proviso and enter the committee stays excluded. A divestment made years earlier for commercial reasons can be respected; an unwinding executed with default in sight, or made conditional on a seat, will not be.

The National Company Law Appellate Tribunal has carried the reasoning across to assignments. A related party cannot cure the disability by selling its debt to a friendly third party, and an assignee introduced to dilute the voting share of genuine creditors is excluded on the same principle even though the assignee is not itself a related party.

The Narrow Carve-Out in the Second Proviso

The second proviso preserves committee membership for a financial creditor regulated by a financial sector regulator that became a related party solely through conversion or substitution of debt into equity, or into instruments convertible into equity, before the insolvency commencement date. It was written for lenders that took equity in a restructuring. An ordinary holding company fits neither limb, and time spent arguing otherwise is wasted.

The Claim Is Admitted, the Vote Is Not

The disability bites on the committee, not on the claim. A related-party financial creditor still submits its proof of claim, the debt is still verified by the resolution professional, and the admitted amount still appears in the list of creditors with a nil voting share against it. Teams get this wrong in both directions: some stop filing on the view that the claim is worthless, others file and assume they have bought influence.

Not filing is the costlier error. A claim that is never admitted will not be provided for in the resolution plan, and it does not survive approval. Filing preserves whatever the plan eventually offers and gives the group standing to be heard on questions such as discriminatory treatment of a class, which is not the same thing as a vote.

Where Intra-Group Debt Sits in the Section 53 Waterfall

Section 53 does not subordinate related-party debt as a category. An unsecured intra-group loan that genuinely answers the description of financial debt ranks with other unsecured financial creditors under section 53(1)(d). The exposure is re-characterisation: advances with no repayment date, no interest and no board sanction invite the argument that the money was promoter contribution in substance, which drops it to the residual rung at section 53(1)(h).

How the four questions a group lender needs answered resolve depends almost entirely on the form the funding took.

Intra-Group Funding as an Avoidance Target

Section 43 deems a corporate debtor to have given a preference where it transfers property or an interest in property for the benefit of a creditor, surety or guarantor on account of an antecedent financial or operational debt, and the transfer puts that person in a better position than it would have occupied in a distribution under section 53. The relevant time under section 43(4) is two years before the insolvency commencement date where the preference is given to a related party, and one year in any other case.

The doubled window is the point for a group. A repayment of the parent's loan made twenty months before admission is examinable when the identical repayment to a bank on the same day is not. Sections 45 and 46 operate the same way for undervalued transactions, with two years for a related party against one year for everyone else.

Ordinary treasury practice sits inside that window: cash pooling and sweeps, netting inter-company balances at year end, transfers of assets to another group entity at book value, repaying the parent ahead of trade creditors when cash is tight. None of it is unlawful. The problem is evidential, because two years later the group has to show why the transfer was ordinary course.

Section 43(3) offers limited shelter. A transfer made in the ordinary course of the business or financial affairs of both the corporate debtor and the transferee is not a preference, nor is a security interest securing new value that was given at or after signing of the security agreement and registered as required.

What Did the 2026 Amendment Change About Avoidance Exposure?

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 came into force for the relevant provisions on 26 May 2026. It inserts definitions of avoidance transaction and of fraudulent or wrongful trading, extends section 66 so that a liquidator may also bring misfeasance proceedings, and provides that avoidance and wrongful trading proceedings survive the conclusion of the resolution process or the liquidation.

Approval of a plan therefore no longer closes the file. Recoveries from avoidance applications are routinely reserved to a creditor trust or to the successful resolution applicant and pursued afterwards. A group retention policy that archives board papers and inter-company reconciliations once the process ends destroys the group's own defence.

The Position of a Parent That Also Holds Security

A parent holding a registered charge is a secured financial creditor and stays one, but security does not restore committee rights: the exclusion applies whether or not the debt is secured. The explanation now attached to section 3(31) confirms that a security interest exists only where created by agreement or arrangement between parties, which presents no difficulty for a properly created and registered charge.

Security changes what happens after the vote. Section 52 allows a secured creditor in liquidation to realise its security outside the estate, and the 2026 Amendment deems security relinquished where the creditor does not inform the liquidator within fourteen days. A further explanation to section 53 confirms that a creditor is secured only to the extent of the value of its security interest, so a defensible valuation is worth obtaining early. Enforcement during the process stays barred by the moratorium under section 14.

Documenting Intra-Group Funding Before Distress

None of this can be repaired after admission. What decides whether an intra-group claim survives is done when the money moves: a written facility agreement with a repayment schedule, evidence of disbursement and end use, interest accrued and recorded in both sets of books, and a lender board resolution recording a commercial rationale rather than reciting a formula.

Section 186 of the Companies Act and the Board Paper That Has to Exist

Section 186 of the Companies Act, 2013 governs the lending side. The loan needs a board resolution passed with the consent of all directors present at the meeting. Where the aggregate of loans, guarantees, securities and investments exceeds sixty per cent of paid-up share capital, free reserves and securities premium account, or one hundred per cent of free reserves and securities premium account, whichever is higher, a special resolution is required, subject to the exemption for a wholly owned subsidiary or a joint venture. Section 186(7) requires interest at not less than the prevailing yield on Government securities closest in tenor to the loan.

The register under section 186(9), charge registration under section 77, and disclosure in the financial statements complete the trail; section 185 has to be cleared separately where a director is interested. A resolution professional testing the claim two years later looks for precisely these documents.

Has Chapter VA on Group Insolvency Come Into Force?

The 2026 Amendment inserts a new Chapter VA empowering the Central Government to prescribe the manner and conditions in which the Code applies where two or more corporate debtors form part of a group. It was left out of the 26 May 2026 commencement notification and remains inoperative pending rules. Each group company therefore continues to run its own process, with its own resolution professional, committee, moratorium and timeline, and no mechanism for consolidation.

Recovery expectations should be set on that footing. Unsecured related-party debt in a completed resolution rarely recovers a meaningful percentage, because a resolution applicant knows the related party cannot vote against the plan and prices the claim accordingly. Where a group needs exposure that is actually recoverable, the workable answers are security taken at the time of funding, lending into the entity that owns the assets, or recording the support as equity from the start.

Frequently Asked Questions

Can a parent company file a claim in the CIRP of its subsidiary if it cannot vote?

Yes. The first proviso to section 21(2) removes representation, participation and voting in the committee of creditors; it does not bar the claim. File within the timeline stated in the public announcement, because a claim that is never admitted will not be provided for in the resolution plan.

Does selling the shareholding before the CIRP begins remove related-party status?

Only if the divestment is genuine. Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. confirms that a creditor who is not a related party at the relevant date is not automatically debarred, but a creditor that shed the label in order to circumvent the proviso and join the committee stays excluded.

Can the group assign the debt so that a third party sits on the committee instead?

Not where the assignment is engineered for that purpose. The appellate tribunal has held that an assignee taken on to dilute the voting share of genuine creditors is excluded even though it is not itself a related party, particularly where the assignment was conditional on obtaining a seat.

How far back can repayments made to the parent be challenged?

Two years before the insolvency commencement date for preferential transactions under section 43, against one year for creditors who are not related parties. The same two-year period applies to undervalued transactions under sections 45 and 46, so group treasury records should be retained on that basis.

Does approval of a resolution plan end the risk of a clawback claim against the group?

No. Following the 2026 Amendment, avoidance and wrongful trading proceedings survive the conclusion of the corporate insolvency resolution process or the liquidation, and recoveries are frequently reserved to a creditor trust or to the resolution applicant. Keep the underlying records well past plan approval.

Does holding security over the subsidiary's assets restore a place on the committee?

No. The exclusion turns on the relationship, not on whether the debt is secured. Security improves rank under section 53 and preserves the section 52 election in liquidation, but a secured parent remains outside the committee for as long as it is a related party.

Can a group be resolved as a single unit under Chapter VA?

Not yet. Chapter VA on group insolvency was enacted by the 2026 Amendment but was not included in the 26 May 2026 commencement notification and awaits rules. Each corporate debtor in a group continues to run a separate process with its own committee and timeline.

Can a related-party financial creditor object to unfair treatment of its class even though it has no vote?

Yes. The exclusion in the first proviso to section 21(2) removes representation, participation and voting; it does not remove standing to be heard. A related-party creditor whose claim is admitted can raise before the committee or the National Company Law Tribunal that its class of creditors, unsecured or secured, has been treated in a discriminatory or inequitable manner compared with a similarly placed class under the resolution plan. This is a narrower right than a vote and does not let the creditor block or reshape the plan on its own terms, but it preserves a check against a plan that singles out related-party claims for treatment inconsistent with the fair and equitable standard the Code requires.

If the parent later pays under a corporate guarantee it gave for the subsidiary's bank debt, does that payment count as related-party debt?

Yes. Once the parent honours the guarantee, it becomes a creditor of the subsidiary by subrogation and steps into the shoes of the lender it paid. Because the parent remains a related party by relationship regardless of how its claim arose, it stays excluded from representation, participation and voting in the committee of creditors on that guarantee claim, and the claim ranks in the same place the underlying bank debt would have ranked. Payments the parent made under the guarantee before the insolvency commencement date remain examinable as preferential or undervalued transactions on the same two-year related-party window that applies to a direct loan.

What evidence turns an intra-group advance into equity in substance rather than genuine debt?

Tribunals look past the label to the terms actually recorded. An advance with no fixed repayment date, no interest, no board resolution recording a commercial rationale, and no demand ever made for repayment reads as capital support rather than a loan, and risks being pushed to the residual rung under section 53(1)(h) rather than ranking as an ordinary unsecured financial debt under section 53(1)(d). A written facility agreement, a repayment schedule that was actually followed or renegotiated on commercial terms, interest accrued and reflected in both companies' books, and a board minute explaining why the group chose to lend rather than invest are what distinguish a recoverable claim from one likely to be re-characterised.

Does missing the board resolution required by section 186 of the Companies Act, 2013 make an intra-group loan unenforceable?

Not automatically. A missing or defective board resolution under section 186 exposes the lending company and its officers to penalty under the Companies Act, 2013, but it does not by itself convert a genuine loan into something unenforceable between the parties. The real cost surfaces later, in the subsidiary's insolvency: a resolution professional testing the claim two years afterward treats the absence of a proper board paper as evidence supporting re-characterisation as equity or as an undocumented, informal advance, which weakens rather than automatically defeats the claim. Board approval taken at the time of lending remains the strongest protection against that argument.

Is there a limitation period for a parent company to file its claim in a subsidiary's CIRP?

The claim must be filed within the time stated in the public announcement made under section 15 of the Insolvency and Bankruptcy Code, 2016, which the resolution professional issues shortly after the insolvency commencement date; this is a procedural filing window rather than a limitation period under the Limitation Act, 1963. A claim received after the committee of creditors has approved the resolution plan is ordinarily not entertained, whatever the underlying debt's limitation position would otherwise have been. Group treasury functions should treat the public announcement date, not the original loan's limitation period, as the operative deadline.

Does related-party status affect the parent's rank if the subsidiary is liquidated, or only its vote during the resolution process?

The two are different consequences and are easy to conflate. Related-party status under section 5(24) affects only the committee of creditors: it removes representation, participation and voting during the corporate insolvency resolution process. Section 53 does not subordinate related-party debt as a category in liquidation; a genuine unsecured intra-group loan still ranks with other unsecured financial creditors under section 53(1)(d), and a secured intra-group loan ranks as a secured creditor under section 53(1)(b) to the value of the security. The risk in liquidation is re-characterisation as equity, landing the claim at the residual rung under section 53(1)(h), not the related-party label itself.

If the parent buys debt from an unrelated creditor of its own subsidiary, does the related-party exclusion apply to that acquired debt too?

The first proviso to section 21(2) turns on whether the person holding the claim is a related party at the relevant date, not on how that person came to hold the debt. A parent that purchases debt originally owed to an unrelated creditor is likely to be treated as a related party in respect of that acquired claim as well, since it is now the parent asserting the claim before the committee. Where the acquisition is timed close to admission or appears designed to secure influence the parent could not otherwise obtain, the reasoning applied to related parties divesting to avoid the proviso should apply here too, in reverse.

Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency and Arbitration Practice at the law firm Vikrant D. Shetty & Associates, Advocates & Solicitors, which advises financial creditors, operational creditors and corporate debtors in proceedings before the National Company Law Tribunal (NCLT), Mumbai Bench, and advises Indian and international groups on intra-group funding, corporate guarantees, security creation and compliance under the Companies Act, 2013.

Related reading: Can Contracts Be Entered Into During a CIRP: What Counterparties Need to Know.

This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please seek direct consultation with an advocate.