Related-Party Creditors & the Committee of Creditors: A Critical Analysis of Section 21(2) of the Insolvency and Bankruptcy Code, 2016, in Light of Phoenix ARC v. Spade Financial Services

The Committee of Creditors (herein referred to as the ‘CoC’) is the de facto board of a corporate debtor upon commencement of the corporate insolvency resolution process (herein referred to as ‘CIRP’) under the Insolvency and Bankruptcy Code, 2016 (herein referred to as ‘IBC’ or ‘the Code’), making composition central. Section 21(2)’s first proviso excludes related-party financial creditors from voting, representation or participation in the CoC, presuming their lack of independence. It examines the related-party exclusion under Sections 5(24) and 21(2), the ruling in Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd., and later jurisprudence. It argues that the Supreme Court’s purposive, in praesenti and anti-circumvention interpretation closed a loophole, but NCLT and NCLAT approaches remain inconsistent on “control”, assignees, and evidentiary thresholds for common directors. It recommends regulatory clarification, drawing on the US insider doctrine.