Vistra ITCL (India) Limited vs Vithal Madhukar Dahake & Ors.

NARESH SALECHA, MEMBER (TECHNICAL)

The present Company Appeal (AT) (Ins) No. 1110 of 2024 has been filed by the Appellant i.e. Vistra ITCL (India) Ltd., under Section 61 of the Insolvency and Bankruptcy Code, 2016 (“Code”), challenging the Impugned Order dated 07.05.2024 passed by the National Company Law Tribunal, Mumbai Bench-IV (“Adjudicating Authority”) in I.A. 2680 of 2023 filed in C.P. (IB) No. 380 of 2021.

Vithal Madhukar Dahake, Resolution Professional of the Corporate Debtor i.e. Radius Estate Projects Pvt. Ltd., is the Respondent No. 1, herein.

Avenue 54 Welfare Association is the Respondent No. 2 herein. The Avenue 54 Welfare Association (Homebuyers) filed an I.A. No. 5827 of 2024 seeking impleadment in the present appeal. The said I.A was allowed vide order dated 18.03.2025 and it was impleaded to the present appeal as Respondent No.2.

Omkara Asset Reconstruction Pvt. Ltd., is the Respondent No. 3 herein.

The Omkara Asset Reconstruction Pvt. Ltd. filed an I.A. No. 6627 of 2024 seeking impleadment in the present appeal. The said I.A was partially allowed vide order dated 13.08.2025 and it was impleaded to the present appeal as Respondent No.3.

Two appeals namely, Company Appeal (AT) (Ins.) No. 1110 of 2024 & Company Appeal (AT) (Ins.) No. 1801 of 2024 were tagged together and heard together, since, few issues were common. However, Parties and facts of both the appeals are different, thus, for the sake of convenience and for better appreciation of facts and law, we are pronouncing separate judgements in both above appeals.

The Appellant contended that it acts as debenture trustee for debenture holders who subscribed to 3,95,00,000 secured optionally convertible debentures of face value Rs.100 each, aggregating to Rs.395 crores, issued by Aaditri Constructions Private Limited (“Company”/ “APCL”) under a Debenture Trust Deed dated 03.08.2018.

The Appellant contended that on 03.08.2018, it executed the Debenture Trust Deed (“DTD”) with the Company, Radius & Deserve Builders LLP (Developer of Project), Mr. Sanjay Chhabria and Mrs. Ritu Chhabria (collectively “Promotors”), pursuant to which the debenture holders subscribed to the debentures having a tenure of five years and disbursed Rs.340 crores. The Appellant was appointed as debenture trustee and the debentures were secured, inter-alia, by mortgage and guarantees in the nature of “covenant to pay”. The Company and the Promotors, defined as “Obligors”, were required to pay the entire secured obligations to the debenture holders.

The Appellant submitted that on 29.03.2019, a First Supplemental Indenture of Mortgage was executed between the Appellant, the Company and the Corporate Debtor whereby mortgage was created over the mortgaged property and the Corporate Debtor undertook an express, unconditional and unequivocal covenant to pay the entire secured obligations. The Appellant contended that this covenant was given in consideration of issuance and subscription of the debentures, thereby making the Corporate Debtor a security provider under the DTD and a guarantor of the obligations of the obligors. The First Supplemental IOM formed part of the security and financial documents.

The Appellant further submitted that on 16.04.2019, the parties executed a Second Supplemental Indenture of Mortgage creating mortgage over additional property and reiterating the Corporate Debtor’s covenant to pay. All parties to the DTD were signatories to this document. The Company subsequently committed various defaults under the DTD and the Appellant issued an event of default notice dated 28.07.2021 calling upon the Company to redeem the debentures. Despite expiry of tenure, the debentures were not redeemed.

The Appellant contended that while it was exploring filing a Section 7 petition, SBICAP Trustee Company Limited filed a Section 7 application against the Corporate Debtor which was admitted on 06.09.2021 and the Respondent No. 1 was appointed as Interim Resolution Professional. The Appellant submitted that on 02.12.2021, it filed its claim in Form-C for Rs.874,03,27,404/- as a secured financial creditor on the basis of the guarantee in the nature of covenant to pay under the mortgage deeds, enclosing all transaction documents. The Respondent No. 1 sought copies of corporate guarantee and related documents by email dated 04.12.2021, the Appellant reiterated its position and furnished documents again through emails dated 07.12.2021 and 21.01.2022 to the Respondent No.1.

The Appellant contended that the Respondent No. 1 failed to verify the claims and kept verification in abeyance due to a purported settlement between the Corporate Debtor and SBICAP Trustee Company Limited. After the Adjudicating Authority dismissed the settlement application on 28.03.2022 and revived CIRP, the Appellant again requested verification by emails dated 04.04.2022 and 18.05.2022, however, the Respondent No. 1 informed that further steps were stayed by appellate order dated 06.04.2022, and verification was again kept in abeyance.

The Appellant submitted that even after disposal of the appeal and vacation of stay by the Appellate Tribunal on 02.06.2022, the Respondent No. 1 still failed to verify the claim. Thereafter, when the settlement again failed and was dismissed on 16.01.2023, the Respondent No. 1 once more sought copies of guarantee documents by email dated 27.01.2023. The Appellant furnished all required documents again on 12.02.2023 explaining its position. The Appellant contended that despite furnishing documents and explanations on three occasions over two years, the Respondent No. 1 rejected its claim as “secured financial creditor” by cryptic email dated 06.04.2023 without reasons, while suggesting it file as “other secured creditor”, thereby admitting the transaction and creation of security interest.

The Appellant submitted that it challenged the said rejection by filing I.A. No. 2680 of 2023 under Section 60(5) of the Code before the Adjudicating Authority. However, by judgment dated 07.05.2024, the Adjudicating Authority wrongly upheld the Respondent No. 1’s decision. Being aggrieved, the Appellant has filed the present appeal.

The Appellant submitted that the mortgage deeds satisfy all ingredients of a contract of guarantee under Section 126 of the Indian Contract Act, 1872. These are tripartite agreements between Financial Creditor, borrower and surety, and contain an express, unconditional covenant by the Corporate Debtor to repay secured obligations. The covenant was given in consideration of subscription to the debentures and therefore constitutes a contract of guarantee.

The Appellant submitted that the Adjudicating Authority erred in holding that the Corporate Debtor’s obligation was limited to default interest. Clause 2 of the mortgage deeds clearly obligates the Corporate Debtor to repay all “secured obligations”, defined as all outstanding amounts relating to the debentures, including principal and Interim Resolution Professional. The Appellant contended that its claim based on the mortgage deeds and Debenture Trust Deed, is a bona fide financial debt arising from a guarantee in the nature of covenant to pay, whereby the Corporate Debtor undertook liability as surety.

The Appellant further submitted that Clause 24 of the DTD makes security providers jointly and severally liable to discharge obligations, thereby making the Corporate Debtor jointly and severally liable to repay debenture amounts, constituting financial debt under the Code. The Appellant relied on Pioneer Urban Land and Infrastructure Ltd. v. Union of India, [(2019) 8 SCC 416] to contend that the definition of financial debt under Section 5(8) is inclusive and expansive and not exhaustive.

The Appellant contended that the Corporate Debtor, as security provider, was a co-obligor jointly and severally liable under the DTD, and co-obligors are financial creditors as held in State Bank of India v. PE Electronics [2018 SCC OnLine NCLT 26427] and Zubin Barucha v. Reliance AIF Management Company [2023 SCC OnLine NCLAT 167]. The Appellant submitted that the Adjudicating Authority wrongly held that absence of disbursement to the Corporate Debtor negates financial debt. The Appellant emphasised that disbursement need not be to the Corporate Debtor itself. Section 5(8)(i) includes guarantees securing debentures, and judgments in BVS Lakshmi v. Geometrix Laser Solutions [2017 SCC OnLine NCLAT 531] and Rajeev Kumar Jain v. Uno Minda Ltd. & Anr. [2024 SCC OnLine NCLAT 28] confirm that disbursement to the corporate debtor is not necessary. The Appellant contended that the guarantee was issued in consideration of monies disbursed to the Company, which belongs to the same group as the Corporate Debtor, thereby satisfying requirements of Section 5(8) of the Code.

Alternatively, the Appellant submitted that Section 5(8)(f) of the Code covers transactions having commercial effect of borrowing. The debenture transaction had such effect, and the Corporate Debtor’s covenant to pay under the mortgage deeds, forms part of that borrowing transaction and constitutes financial debt. The Appellant contended that the Adjudicating Authority did not read the DTD and mortgage deeds together as part of one transaction and instead relied selectively on certain provisions. The Appellant submitted that reliance on Anuj Jain v. Axis Bank [(2020) 8 SCC 401] was misplaced as that case involved mortgages without covenant to pay. Similarly, reliance on Vistra ITCL v. Dinkar Venkatsubramanian [2023 SCC OnLine SC 570] and NOIDA v. Anand Sonbhadra [(2023) I SCC 724] was erroneous as those cases dealt with pledges and leases without covenants to pay.

The Appellant submitted that recent judgement by Hon’ble Supreme Court of India in the case of China Development Bank v. Doha Bank Q.P.S.C., [(2025) 7 SCC 729] where the Apex Court held that covenant to pay tantamount to guarantee and thus its claim are squarely covered as Financial Debt in terms of Section 5 (8) of the Code.

The Appellant contended that the Adjudicating Authority wrongly held that guarantee was not invoked. During CIRP, existence of financial debt is sufficient for claim admission; invocation is not a prerequisite. Non-invocation does not amount to waiver, and non-issuance of Event of Default Notice (EOD) to the Corporate Debtor is irrelevant. The Appellant submitted that the Respondent No. 1 never disputed the transaction, mortgage deeds or security interest. In light of such admissions, the claim ought to have been classified as secured financial creditor.

The Appellant contended that the Adjudicating Authority held that remedy lies only in enforcement of mortgage. The covenant to pay creates independent personal liability in addition to mortgage rights. The Appellant further submitted that the Adjudicating Authority held that covenant to pay is linked only to mortgaged property and creates no personal liability, which is contrary to Section 126 of the Contract Act and, alternatively, Section 68(1)(a) of the Transfer of Property Act.

The Appellant contended that it had explained and supported its claim with documents on three occasions over two years and the Respondent No. 1 failed to properly verify the claim. The Appellant submitted that the mortgage deeds form part of finance documents and must be read with the DTD. Clause 3 shows that the covenant to pay was given in consideration of debenture subscription and cannot be read in isolation. Alternatively, the Appellant contended that under Section 68(1)(a) of the Transfer of Property Act, a mortgagee has a right to sue for mortgage money, giving rise to a right to payment constituting a claim under Sections 3(6) and 3(11) of the Code and thereby a financial debt under Section 5(8) of the Code.

The Appellant submitted that the Adjudicating Authority erred by relying only on Clause 2.2 of the mortgage deeds while ignoring other sub-clauses of Clause 2. The Appellant contended that nomenclature of document is immaterial and the covenant to pay clearly creates a guarantee irrespective of whether it is titled as such. The Appellant submitted that the Respondent No. 1’s role is limited to collating and verifying claims and not adjudicating their admissibility, and the Adjudicating Authority exercised jurisdiction in upholding such rejection.

The Appellant stated that the Adjudicating Authority haserred in holding that the Corporate Debtor's covenant to pay was limited only to default interest and did not extend to the principal amount along with normal IRR when Clause 2 of the Mortgage Deeds expressly provide that the Corporate Debtor shall pay the Secured Obligations. Pertinently, the expression "Secured Obligations" has been defined in the First Supplemental IOM as "all outstanding amounts in relation to the Debentures under the Debenture Trust Deed''.

Concluding the arguments, the Appellants requested this Appellate Tribunal to set aside the Impugned Order and allow its appeal.

Per contra, the Respondent No. 1, denied all averments made by the Appellants as misleading and baseless.

The Respondent No. 1 submitted that the present Appeal challenges the Impugned Order dated 7 May 2024 passed by the Adjudicating Authority in I.A. No. 2680 of 2023 in Company Petition No. 380 of 2021, whereby the Adjudicating Authority rejected the Appellant’s application seeking admission of its entire claim as a secured financial creditor. The Respondent No. 1 contended that the Appellant has claimed an amount of Rs. 874,03,27,404/- as on the insolvency commencement date against the Corporate Debtor, purportedly arising from a DTD dated 03.08.2018 executed between the Appellant, Aaditri Constructions Private Limited (“ACPL”), Radius & Deserve Builders LLP, and the promoters. The Respondent No. 1 submitted that the Appellant’s claim is based on an alleged guarantee said to arise from mortgage deeds containing a covenant to pay.

The Respondent No. 1 submitted that ACPL proposed to raise funds by issuing 3,95,00,000 optionally convertible debentures of face value Rs. 100 each, aggregating to Rs. 395 crores, on a private placement basis. ACPL had earlier entered into a DTD dated 05.09.2017 appointing the Appellant as debenture trustee, which required execution of a DTD in the prescribed form within the stipulated time.

The Respondent No. 1 submitted that pursuant to this arrangement, a Debenture Trust Deed dated 03.08.2018 was executed between the Appellant, ACPL, the developer, and the promoters. The said deed recorded the terms for issuance of debentures and appointment of the Appellant as debenture trustee. It was one of the terms of the transaction that the debenture payments and secured obligations under the debenture documents would be secured by creation of security by ACPL, the developer, and the promoters in favour of the debenture trustee.

The Respondent No. 1 submitted that a sum of Rs. 340 crores were disbursed to ACPL in tranches between 04.10.2017 and 04.04.2019 against issuance of optionally convertible debentures. It was specifically contended that the Corporate Debtor was neither a party to the original borrowing arrangements nor did it receive any amount from the Appellant under these disbursals.

The Respondent No. 1 submitted that a Supplemental Indenture of Mortgage dated 29.03.2019 was executed by the Corporate Debtor, along with other parties, to secure outstanding amounts under the debenture documents by creation of a first-ranking mortgage in favour of the Appellant over specified residential units forming part of a project known as “Avenue 54”. Subsequently, a Second Supplemental Indenture of Mortgage dated 16.04.2019 was executed creating additional mortgage over certain land and rights therein. It was contended that the Corporate Debtor created security by way of mortgage over its properties to secure obligations of ACPL under the debenture documents.

The Respondent No. 1 contended that the Appellant’s claim arises solely from mortgages created by the Corporate Debtor to secure debentures issued by ACPL and that such claim does not fall within the definition of “financial debt”. The Respondent No. 1 submitted that the Appellant was requested to file its claim as an “other secured creditor”, but the Appellant refused to do so.

The Respondent No. 1 submitted that no amount was ever disbursed by the Appellant to the Corporate Debtor. The debenture proceeds were disbursed to ACPL alone. The Corporate Debtor was neither a borrower nor a beneficiary of the funds and is not a shareholder in ACPL. Accordingly, the transaction does not satisfy the requirements of Section 5(8) of the Code, and the Appellant cannot be treated as a financial creditor of the Corporate Debtor. The Respondent No. 1 contended that the Corporate Debtor is neither a corporate guarantor nor a co-obligor and that the Appellant’s interest is protected only to the extent of the mortgaged properties. The Respondent No. 1 submitted that the Appellant does not fall within the meaning of “financial creditor” under Section 5(7) of the Code vis-à-vis the Corporate Debtor.

The Respondent No. 1 relied on the judgment of the Hon’ble Supreme Court in Anuj Jain - Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited, (2020) 8 SCC 401 wherein it was held that where a corporate debtor creates mortgage to secure the debt of a third party without receiving disbursement itself, the mortgagee cannot be treated as a financial creditor. It was submitted that a person having only security interest over assets of the corporate debtor may be a secured creditor but not a financial creditor, and inclusion of such persons as financial creditors would defeat the objectives of the Code.

The Respondent No. 1 further relied on the judgment of the Hon’ble Supreme Court in NOIDA v. Anand Sonbhadra (Supra), wherein it was emphasised that disbursement to the corporate debtor is an indispensable requirement for classification as financial debt. It was submitted that any disbursement made by the Appellant to ACPL may entitle the Appellant to be a financial creditor of ACPL, but not of the Corporate Debtor.

The Respondent No. 1 also relied upon the judgment in Vistra ITCL Ltd. v. Dinkar Venkatasubramanian (Supra), wherein the Hon’ble Supreme Court treated Anuj Jain as good law. Further reliance was placed on the decision of this Appellate Tribunal in Edelweiss Asset Reconstruction Company Ltd. v. Anuj Jain, Company Appeal (AT) (Insolvency) No.517 & 518 of 2023 which clarified that certain observations in Vistra were confined to the facts of that case.

The Respondent No. 1 contended that even if the mortgage deeds contain a covenant to pay, the same cannot be equated with a deed of guarantee. A claim based on mortgage securing a third-party debt does not qualify as a secured financial debt and can at best be treated as a claim of an “other secured creditor”. The Respondent No. 1 submitted that the Appellant’s claim has not been rejected but has only been classified appropriately.

The Respondent No. 1 submitted that in discharge of his statutory duties under the Code, he has merely collated and verified claims and has not exercised any adjudicatory function. Reliance was placed on the principles laid down in Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 that the resolution professional’s role is limited to verification and collation of claims. The Respondent No. 1 submitted that he requested the Appellant to file its claim under the correct category based on the documents provided.

The Respondent No. 1 also submitted that the transaction in question has been identified as a potentially avoidable transaction, as the Corporate Debtor mortgaged its properties without receiving consideration and in circumstances where ACPL and the Corporate Debtor had common directors. It was contended that the mortgage appears to have been created for the benefit of promoters and may constitute an undervalued transaction under Section 45 of the Code. Accordingly, an application has been filed by the Respondent No. 1 before the Adjudicating Authority in this regard, which is still pending for adjudication.

Concluding his arguments, the Respondent No. 1 requested this Appellate Tribunal to dismiss the appeal with cost.

The Avenue 54 Welfare Association/Respondent No. 2 submitted that they do not wish to file any reply as per order of this Appellate Tribunal dated 01.09.2025. The said order reads as under: -

The Respondent No. 3 submitted that it is a secured financial creditor of the Corporate Debtor, Radius Estate Projects Private Limited and holds a significant voting share in the Committee of Creditors. The Respondent No. 3 submitted at the outset that the classification of the Appellant as an “Other Secured Creditor” by Respondent No. 1 and as upheld by the Adjudicating Authority by Order dated 07.05.2024, is correct and in consonance with the provisions of the Code. The Respondent No. 3 contended that the Appellant’s claim does not qualify as a “financial debt” under Section 5(8) of the Code, as no funds were ever disbursed to the Corporate Debtor against consideration for the time value of money and the Corporate Debtor merely created security by way of mortgage over its assets to secure the obligations of ACPL. The Respondent No. 3 contended that the alleged guarantee provided by the Corporate Debtor is at best contingent and does not create a direct debtor–creditor relationship with the Appellant in the nature of financial debt. Reliance was placed on the judgment of the Hon’ble Supreme Court in Anuj Jain v. Axis Bank Limited (2020) 8 SCC 401, wherein it was held that the essential elements of financial debt include disbursal of money against time value of money and such disbursal must be to the corporate debtor itself.

The Respondent No. 3 further submitted that the Hon’ble Supreme Court has held that where a corporate debtor merely creates a mortgage or other security over its property to secure repayment of a loan availed by a third party, such a transaction does not constitute a financial debt qua the corporate debtor. In such circumstances, the consideration for the time value of money flows to the principal borrower and not to the corporate debtor. Accordingly, the Appellant cannot be treated as a financial creditor of the Corporate Debtor.

The Respondent No. 3 submitted that the mortgage deeds executed by the Corporate Debtor only create a security interest over its assets. This renders the Appellant a secured creditor within the meaning of Sections 3(30) and 3(31) of the Code, but not a financial creditor. The Respondent No. 3 contended that the classification of the Appellant as an “Other Secured Creditor” is therefore appropriate, as the debt in question does not fall within the ambit of financial debt.

The Respondent No. 3 submitted that the Appellant has failed to demonstrate any infirmity or error in the Order dated 07.05.2024 passed by the Adjudicating Authority, which is well-reasoned and in accordance with the provisions of the Code and settled judicial precedents. It was contended that the Appeal is devoid of merit and does not warrant any interference by this Appellate Tribunal.

Concluding its arguments, the Respondent No. 3 requested this Appellate Tribunal to dismiss the appeal with cost

After noting the rival contentions of the parties, we frame following issues to decide the present appeal.

I. Whether disbursement of debt to the Corporate Debtor is a prerequisite for classification of a debt as "financial debt" under Section 5(8) of the Code?

II. Whether the Appellant qualifies as Financial Creditor under Section 5 (7) r/w Section 5(8) of the Code? Further, Whether the Appellant's claim was a "secured financial debt"?

III. Whether the “covenant to pay” in the Mortgage Deed create an enforceability guarantee or merely secures the mortgage?

IV. Whether a "covenant to pay" for the debt disbursed by the Appellant to a third party (APCL) undertaken by the Corporate Debtor amounts to a contract of guarantee under Section 126 of the Indian Contract Act, 1872?

V. Whether the liability of the Corporate Debtor under "covenant to pay" is only limited to the extent of mortgage provided by it?

Since, all these issues are inter-connected, inter-related and inter-dependent, we shall deal with these in a conjoint manner on wholistic basis to decide the present appeal.

At this stage, we consider the relevant Section of the Code, Indian Contract Act and Transfer of Property Act 1882.

Section 3 of the Code defines Debt and Claim as :-

Section 5 (7) of Code is reproduced hereunder: -

Section 5 (8) of Code is reproduced hereunder: -

Section 58 of Transfer of Property Act 1882: -

Section 126 and 128 of the Indian Contract Act, 1872 are reproduced hereunder

We note that the present Appeal has been filed by the Appellant assailing Impugned Order dated 7^th May, 2024 passed by the Adjudicating Authority in Interlocutory Application No. 2680 of 2023 in Company Petition No. 380 of 2021, inter alia, rejecting the IA preferred by the Appellant seeking admission of its entire claim as a Secured Financial Creditor, whereby, the Appellant sought admission of its claim to the tune of Rs. 874,03,27,404/- as on the Insolvency Commencement date against the Corporate Debtor in relation to Debenture Trust Deed dated 3^rd August, 2018 executed between the Appellant, APCL, Radius and Deserve Builders LLP, Mr. Sanjay Chhabria and Mrs. Ritu Chhabria. The claim of the Appellant is arising out of alleged guarantee given by the Corporate Debtor under Mortgage Deeds in the nature of a covenant to pay.

We take into consideration that ACPL proposed to borrow funds by way of issuing 3,95,00,000 optionally convertible Debentures of face value of Rs. 100 each on private placement basis up to aggregate value of Rs. 395 crores. ACPL had entered into and executed a Debenture Trustee Agreement (DTD) dated 5th September, 2017 for appointment of the Appellant as the Debenture Trustee in respect of the aforesaid borrowing.

We note that a Development Management Agreement dated 2lst September, 2017 was executed between M/s Radius and Deserve Builders LLP (Developer) and ACPL for appointment of ACPL as the Development Manager for the purposes of development of a sanctioned project on a portion of larger land admeasuring 53,192.35 sq. mts. situated at Chembur, Mumbai and APCL provided a non-interest-bearing deposit of Rs. 50 crores and an interest-bearing loan of Rs. 345 crores to the Developer to be used for the purposes of the Sanctioned Project. A subsequent Development Management Agreement dated 3^rd August, 2018 replaced the earlier Agreement. It has also been brought out that ACPL needing capital for satisfying its obligations under the new Development Management Agreement, approached the Appellant in its capacity as the Trustee of HDFC Capital Affordable Real Estate Fund - I, acting through its investment manager HDFC Capital Advisors Limited, for granting financial facilities to ACPL. Consequently, a DTD dated 3^rd August, 2018 was executed between the Appellant, ACPL, Radius and Deserve Builders LLP (Developer), Mr. Sanjay Chhabria (Promoter 1) and Mrs. Ritu Chhabria (Promoter 2) to record the terms and conditions for issuance of Debentures, appointment of Debenture Trustee and matters connected therewith.

One of the terms of the issue of debenture as recorded in Recital 0 of the said Agreement was that the Debenture Payments and discharge of Secured Obligations under the said Deed and other transaction documents in respect of the Debentures shall be secured by ACPL, M/s Radius and Deserve Builders LLP (Developer), Mr. Sanjay Chhabria (Promoter 1) and Mrs. Ritu Chhabria (Promoter 2) by creating Security in favour of the Debenture Trustee for the benefit of the Debenture Holders.

We take note of the facts that a Supplemental Indenture of Mortgage dated 29th March, 2019 was executed between the Corporate Debtor (Mortgagor), Sumer Radius Realty Private Limited ("SRRPL '') (Confirming Party 1), Sumer Buildcorp Private Limited ("SBPL '') (Confirming Party 2), the Appellant (Mortgagee), ACPL (Borrower/Issuer) and M/s Radius and Deserve Builders LLP (Developer) in order to secure all outstanding amounts in relation to the Debentures under the DTD. It is under the said DTD that the Corporate Debtor agreed to confirm an exclusive first ranking charge by way of mortgage in favour of the Appellant.

We further take into consideration that a Second Supplemental Indenture of Mortgage dated 16th April, 2019 was also executed between the Corporate Debtor (Mortgagor), Radius and Deserve Builders LLP (Developer), ACPL (Borrower), Mr. Sanjay Chhabria (Obliger 1), Mrs. Ritu Chhabria (Obliger 2), the Appellant (Mortgagee) in order to further secure the Secured Obligations under the DTD and in furtherance of the Supplemental Indenture of Mortgage dated 29th March, 2019. It is under the said Agreement that the Corporate Debtor has agreed to create by way of exclusive first charge, mortgage and security by way of registered mortgage in favour of the Appellant on the Additional Mortgaged Properties.

It is the case of the Appellant that the said debt arising out of the aforesaid Mortgage Deeds falls squarely within the definition of the term 'financial debt' as defined under Section 5 (8) ( c) of the Code being a debt along with interest which is disbursed against the consideration for the time value of money and includes any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument.

It is the claim of the Appellant that defaulted amount, pertains to the mortgage created by the Corporate Debtor in favour of the Appellant against issuance of Debentures by ACPL. Per contra, the Respondent No. 1 pleaded that the same does not fall within the definition of 'Financial Debt' and at the best could have been treated as other secured debt.

We are conscious of the fact that no amount has been disbursed to the Corporate Debtor by the Appellant and the mortgage was created to secured rights of the Appellant for borrowing by ACPL against issuance of optionally convertible Debentures which was disbursed to ACPL and not to the Corporate Debtor. It is the case of the Respondent No. 1 that the said transaction of mortgage does not fall within the meaning of financial debt as per Section 5(8) of the Code since no disbursement was made to the Corporate Debtor and therefore the said debt cannot be treated as a financial debt qua the Corporate Debtor and the Appellant cannot be treated as a Financial Creditor of the Corporate Debtor to the extent of the said claim.

Thus, we need to deliberate the issue whether the direct disbursement to the Corporate Debtor is sine qua non under section 5 (8) of the Code. We find that Disbursement refers to the actual release or payment of money pursuant to a financial arrangement. Disbursement indicate the outflow of funds by a financial creditor as part of financial arrangements. It implies that money has been advanced or made available with an expectation of repayment. Disbursement therefore is a foundational element in determining whether a transaction qualifies as “financial debt.” However, the pivotal issue is whether such disbursement need to be directly made only to Corporate debtor or it can be otherwise also. Section 5(8) of the Code defines “financial debt” as: “A debt along with interest, if any, which is disbursed against the consideration for the time value of money”

We carefully observe that the Section does not use the word “to the Corporate Debtor” after word “disbursed”. From the statutory language, the essential ingredients of financial debt are Existence of a debt, Disbursement of money, Consideration for time value of money and Commercial effect of borrowing.

We consciously observe that the provision does not expressly stipulate that the disbursement must be made directly to the Corporate Debtor. The expression “sine qua non” means an indispensable or mandatory condition. The question arises whether direct transfer of funds to the Corporate Debtor is an essential prerequisite for a debt to qualify as financial debt under Section 5(8) of the Code earlier. The statutory text of Section 5(8) of the Code does not mandate that disbursement must be made exclusively or directly to the Corporate Debtor. What the statute requires is disbursement against consideration for time value of money, not necessarily direct transfer into the Corporate Debtor’s account. Accordingly, it can be held that direct disbursement to the Corporate Debtor is not a sine qua non. We may add that, however, this becomes a significant contributory factor to determine the actual nature of transaction between the Financial Creditor and the Corporate Debtor, which can vary from case to case as per its own peculiar facts.

We shall take into consideration, judgement cited by all the parties, delivered by the Hon'ble Supreme Court of India in the matter of Anuj Jain -Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited (Supra) where it was held that when the Corporate Debtor creates mortgage to secure payment obligation of a third party, without disbursement of any debt to the Corporate Debtor, the mortgagee, even if becoming a secured creditor because of creation of mortgage, could only be described as 'indirect secured creditor' and cannot be treated as a 'direct secured creditor' so as to become a 'financial creditor' because, the mortgage transaction is not envisaged to be a 'financial debt' in terms of Section 5(8) with its sub- clauses (a) to (i) of the Code.

We will also refer to the judgement in the case of Rajeev Kumar Jain v. Uno Minda Limited [2024 SCC OnLine NCLAT 28], where, the appellant had disbursed funds which were not directly credited into the bank account of the Corporate Debtor. Instead, the money was paid to third parties (such as vendors/suppliers) pursuant to instructions and for the benefit of the Corporate Debtor. The Adjudicating Authority had rejected the claim on the ground that no direct disbursement was made to the Corporate Debtor. The matter was challenged before this Appellate Tribunal. The Core Issue before this Appellate Tribunal was to determine whether direct disbursement of money to the Corporate Debtor is mandatory for a debt to qualify as “financial debt” under Section 5(8) of the Code. It was held that Section 5(8) of the Code does not require that disbursement must be made directly to the Corporate Debtor. If money is disbursed on behalf of or for the benefit of the Corporate Debtor, and the transaction carries consideration for time value of money, the requirement of financial debt may still be satisfied. It has been brought out that this judgement has not been challenged and thus attained finality.

Thus, we hold that direct disbursement of the Corporate Debtor is not sine qua non. We therefore do not agree to the arguments of the Respondent No.1 and Respondent No.3 on this point and also find that Adjudicating Authority erred on this issue in the Impugned Order.

The other crucial issue in the appeal is whether the mortgage deed containing the words “covenant to pay” is to be treated as 'Deed of Guarantee' and otherwise and whether the Appellant’s claim, which is based on mortgage, fall under the category of 'Secured Financial Creditor' or alternatively would fall under the category of 'Other Secured Creditor'.

At this stage, we take into consideration the relevant portion of the Debenture Trust Deed

(Emphasis Supplied)

After examination of above relevant clauses of DTD, we find that APCL, Borrower, Radius LLP/ Developer and the Promoters are collectively referred to as the “Obligors”. “Security Interest” refers to any security interest created for the purposes securing the obligations of APCL in relation to the HDFC Capital/ Debentures and inter alia include mortgage or any other agreement or arrangement having the effect of conferring Security in favour of Debenture Trustee. Further, “Security Providers” mean the Obligors and include any other person which has created or agreed to create any Security Interest for or in relation to the Debentures. Similarly, “Secured Obligations” mean all present and future obligations and liabilities of the Obligors to the Debenture Holders including the connection with the issue and subscription of the Debentures, the Debenture Payments under the Transaction Documents. We also note that under clause 7, Security, inter alia, includes mortgage, and corporate guarantee from Radius LLP/ Developer and such other entities as may be specified by HDFC Capital/ Debenture Holders. Finally, clause 24 stipulated that The Security Providers shall be jointly and severally liable for their obligations.

From above DTD dated 03.08.2018, we observe that it was signed between the Appellant and ACPL, who was the principal borrower, M/s Radius & Deserves Builders LLP who is a Developer and incidentally not a Corporate Debtor along with two promoters Mr. Sanjay Chhabria and Ms. Ritu Chhabria.

We observe that the company i.e., APCL, Developer and Promoters were collectively termed as obligors. At this stage, we may note that the obligor is a person or entity who owes or undertakes an obligation to another by contract or other legal documentation in financial arrangements normally an obligor is a debtor or borrower or someone who has given security and guarantee for the payment of debt or performance of an obligation. The obligor or co-obligor are directly involved in the transaction between the debtor and the creditor assuming the obligations with regard to the repayment of debt. The obligor may also be called by different names including debtor. On the other hand, the guarantor may not necessarily be directly involved in the transaction between the main debtor and the creditor.

The star point of the Respondent No. 1 is that the Corporate Debtor was not a signatory to the DTD and was not an obligor.

DTD has given exact definition and meaning of the term security, along with the security interest, security provider, security cover, security obligation, security documentation. Security interest includes any security interest created for the purpose of securing obligations of the company in relation to debentures and includes, mortgage, pledge with guarantee, personal guarantee for any other agreement or arrangement having the effect of conferring and security in favour of the debenture trustee.

Similarly, security provider has been referred to as obligor and include any other person who has created or agreed to create any security interest for or in relation to debenture. It is important to note that security obligations has been defined as present and further obligations and liabilities of the obligors to the debenture holders. From above, it is seen that secured obligations including debenture payment payable in respect to debentures and performance of obligors of their obligations have been secured by security in favour of debenture trustee.

Various type of security has been defined in clause 7 from (i) to (vi). (i) stipulates English mortgage (without position of mortgaged properties) and (vi) stipulates other security as may be created in favour of debenture trustee from time to time. Thus, we note that Radius Estate Projects Pvt. Ltd. i.e., Corporate Debtor, which although was not party to above DTD., however, in terms of Clause 7, it includes any other securities as may be created in favour of debenture trustee from time to time, the Corporate Debtor may find place in this chain. Thus, we need to understand whether at any later stage, the Corporate Debtor became party to offer security in favour of the debenture trustee which falls in the definition of security under clause 7 of the DTD and resultantly will fall in the definition of security provider etc.

Hence, we need to refer to Supplemental First and Second Indenture of Mortgage. Now, we will take into consideration the relevant portion of Clauses of First Supplemental Indenture of. Mortgage dated 29.03.2019

From above First Supplemental Indenture of Mortgage, we observe that Recital D defines “Secured Obligations” as all outstanding amounts under the DTD and “Mortgaged Property” mean assets mortgaged in favour of the Appellant as described in the First Schedule. Further, “Security Interest” inter alia means any mortgage or any other agreement or arrangement having the effect of conferring Security in favour of Mortgagee in respect of the Secured Obligation. We also note that Clause 2, identical in both the IOM’s stipulate that in consideration of the Debenture Holders subscribing to the Debentures, the Corporate Debtor covenants to and agrees to discharge the Secured Obligations according to the terms and conditions of the Finance Documents. We have also noted the definition of “Secured Obligation” and “Finance Documents” in earlier discussions. We note that, in terms of these clauses, the Corporate Debtor has confirmed and declared that the Security has been provided in consideration of the Debenture Holders subscribing to the Debentures and the same is good and adequate consideration. Further, in terms of Cause 12 (a) (i), the Corporate Debtor has to discharge the Secured Obligations in accordance with the DTD and other Finance Documents.

We also take into consideration that clause 21 binds the Mortgager/Corporate Debtor for any deficiencies occurring arising or existing under finance documents.

Now, we shall refer to Second Supplemental Indenture of Mortgage dated 16.04.2019.

Thus, we note that Second Indenture of Mortgage was signed by the Corporate Debtor, APCL and the Appellant. “Security Interest” has been assigned meaning of any mortgage or Security Agreement of any kind or nature whatsoever. We also note that “Security Obligations” have been referred to under DTD and Transaction documents. In terms of, clause 11 (a) (i) makes the Corporate Debtor bind to discharge the Secured Obligations in terms of DTD and Finance Documents.

From above, it is seen that the Corporate Debtor has signed its supplemental indenture of mortgage on 29.03.2019 along with Super Radius Reality as first confirming party and Summer Build Corp. Private Limited as second confirming party that the Appellant and APCL (principal borrower) and M/s Radius & Deserves Builders LLP (developer). The Corporate Debtor has been defined as mortgagor and the indenture of mortgage takes into consideration, the debenture trust deed DTD dated 03.08.2018 (noted earlier) the indenture of mortgage dated 10.08.2018 signed earlier amongst the parties.

The Corporate Debtor as mortgagor, has categorically stated that to further secure outstanding amount in relation debentures under DTD (secured obligations) and have agreed to create charge by way of mortgaged in favour of mortgagee of the mortgage properties as stipulated in first schedule. The term finance document has been clearly defined to mean debenture trust deed, transaction document and all other agreements executed by issuer. Similarly, the term indenture, project, mortgaged property, project properties etc have also been defined.

The most crucial part of the First supplemental indenture dated 29.03.2019 is clause 2 i.e., covenant to pay. For sake of clarity, the Clause 2 is reiterated as under: -

It is noted that Clause 2.2 clearly mention the fact that the mortgagor i.e., Corporate Debtor covenant and agrees with the mortgagee i.e., the Appellant to discharge (secured obligations) in accordance with terms and conditions of the finance documents. We have already noted the terms finance documents and secured obligations and shall not repeat the same herein again. Clause 2.2 records the covenant of the mortgagor i.e., Corporate Debtor that in event of mortgagor failed to discharge security obligations w.r.t. debts as set out in DTD, then the mortgagor shall pay default interest at the rate of mentioned therein and has further agreed with the provisions relating to default and discharge of secured obligations, which shall not be allowed to fall in arrears.

From Clause 2.2, it is important to note that the mortgagor has undertaken liabilities of make payment to default interest in case of default of secured obligation payable towards Appellant and further and more significantly, the mortgagor binds himself to the condition that secured obligations will not be allowed to fall in arrears. This tantamount that mortgagor has assumed the role of surety or of a guarantor to satisfy the secured obligations towards the Appellant.

We have already noted the term secured obligations has been defined in the DTD dated 03.08.2018, which means of present and future obligations and liabilities of the obligors to the debenture holders including debenture payment etc. Although we have observed that the name of the Corporate Debtor was not there in the original DTD dated 03.08.2018 however, by signing as a first party to the first and second supplemental indenture of mortgage dated 29.03.2019 and dated 16.04.2019 and the Corporate Debtor has stepped into the shoes of the obligors.

We observe that claim of the Appellant has not been denied by the Respondent No. 1 but has been classified as Other Secured Creditor and not as Secured Financial Creditor. We further note that the Respondent No. 1 and Respondent No. 3 pleaded that Covenant to Pay" under Clause 2 of the first supplemental indenture does not create an Independent Guarantee and argued that the Appellant's reliance on Clause 2.1 of the Mortgage Deeds to assert the existence of a standalone guarantee is legally untenable and contextually incomplete and the "Covenant to Pay" needed be read holistically, comprising both Clause 2.1 and Clause 2.2 of the Mortgage Deeds. The Respondent No. 1 & 3 further submitted that Clause 2.1 Independently Cannot Constitute a Guarantee as Clause 2.1 of the Mortgage Deeds records the Corporate Debtor's undertaking to "discharge the Secured Obligations" in accordance with the DTD. The Respondent No. 1 and Respondent No. 3 also argued that this clause, when read independently, does not constitute a guarantee under Section 126 of the Indian Contract Act, 1872. It is the argument of the Respondent No.1 and Respondent No.3 that Clause 2.1 of the Mortgage Deed merely records the Corporate Debtor's undertaking to pay the "Secured Obligations.". Whereas Clause 2.2 immediately qualifies and limits this undertaking by stipulating that: " ...in the event of failure to pay the Secured Obligations, the Corporate Debtor shall pay default interest at the rate mentioned in the said DTD. It is therefore the case of Respondent No. 1 and Respondent No. 3 that Clause 2.2 expressly defines the consequence of non-compliance with Clause 2.1 and limits the Corporate Debtor's liability to payment of default interest only, as specified in the DTD. The Respondent No. 1 and Respondent No. 3 also pleaded that Clause 2.1 is a mere covenant to perform obligations in accordance with the DTD. It does not contain any language addressing "failure to pay," "event of default," or any contingency triggered by non-payment. It is further the case of Appellant that a guarantee, by its very nature under Section 126 of The Indian Contract Act, 1872, contemplates a promise to discharge the obligation of another in the event of their default. Clause 2.1 contains no such conditional or default-triggered language.

The Respondent No. 1 & 3 also empathetically highlighted distinction from China Development Bank where the Appellant's reliance on the Hon'ble Supreme Court's judgment in China Development Bank v. Doha Bank Q.P.S. C., (2025) 7 SCC 729, treating this as misplaced and distinguishable, since in China Development Bank, the Hon'ble Supreme Court of India interpreted Clause 5(iii) of the Deed of Hypothecation, which expressly commenced with the language: "In the event that an event of default has occurred". That clause then obligated the chargers to "pay on demand ... any shortfall or deficiency" after enforcement and realisation of security. The Hon'ble Supreme Court held that this latter part of Clause 5 (iii) amounted to a guarantee precisely because, upon default and post-realisation shortfall, the corporate debtor agreed to discharge third-party liabilities. Hence, this clause in China Development Bank was expressly triggered by an "event of default" and created a specific obligation to pay any shortfall after enforcement. The Respondent No. 1 and Respondent No. 3 further argued that in stark contrast, Clause 2.1 in the present case, contains no such default-triggered language, no reference to "failure to pay," and no commitment to discharge shortfall amounts.

We also take note of the arguments of the Respondent No. 1 & 3 that mere Co-Obligation to Discharge does not equal to Guarantee: A mere covenant to "discharge Secured Obligations" (which includes payment of amounts under the DTD) cannot, without more, be termed a guarantee. Such language reflects, at best, a primary co-obligation or a performance covenant, not a secondary liability contingent upon another's default—which is the hallmark of a guarantee under Section 126 of the Indian contract Act, 1872. The Respondents submitted that such an interpretation would amount to rewriting the contract rather than interpreting it. Therefore, the Respondent No. 1 and Respondent No. 3 pleaded that Mortgage Deeds do not create a guaranteed obligation under Section 126 of the Indian Contract Act, 1872. The obligation to pay is conditional, enforcement-linked, and limited to default interest only and not for the whole debt lent to APCL.

Thus, we need to now deep dive into the aspects of covenant to pay: In our understanding, a covenant to pay is a legally binding promise in a contract where one party commits to pay a specified sum to another, often on demand or a fixed date, commonly seen in loan agreements, security documents, promissory notes, and deeds. It forms the primary obligation in debt instruments, ensuring the debtor (covenantor) repays principal, interest, or other liabilities to the creditor (covenantee). Covenant to pay directly enforces payment, surviving even if security is invalidated. It covers present/future debts, liabilities, or specified amounts; can be "all monies" clauses. The covenant to pay gains heightened significance under the Code, particularly in distinguishing financial creditors and enforcing claims during corporate insolvency resolution processes. A covenant to pay in security documents like deeds of hypothecation or mortgages deed can transform a security provider into a financial creditor, if it includes an explicit promise to discharge liabilities i.e shortfalls.

We need to carefully examine clauses for Covenant to pay wrt Section 126 of the Indian Contract Act, 1872. This will also impact the Appellant to qualify its loans as financial debt under Section 5(8) of the Code even without direct disbursement to the covenantor. We may also observe that mere security without such a covenant limits status to creditor, may be even as other secured creditors. We note that mortgage deed signed by the corporate debtor (mortgagor) with a "covenant to pay" clause may prima- facie amount to financial debt under Section 5(8) of the Code, provided the covenant creates a promise to discharge the liability, akin to a guarantee under Section 126 of the Indian Contract Act, 1872. Section 5(8) of the Code defines "financial debt" as a debt disbursed against the time value of money, inclusively covering guarantees and obligations from securing third-party debts when there's an explicit payment undertaking by the corporate debtor. A mere security interest (like a simple mortgage without personal liability) does not qualify as financial debt, as clarified by Hon’ble Supreme Court in Anuj Jain v. Axis Bank (2021) and Phoenix ARC Pvt. Ltd. v. Ketulbhai Ramubhai (2021), where third-party mortgages without payment covenants were held to create only "debt" under Section 3(11) of the Code and not financial debt.

Recently Hon’ble Supreme Court of India rulings emphasize substance over form stating that a Deed of Hypothecation (similar to a mortgage deed) with a clause requiring the corporate debtor to pay any shortfall after asset enforcement was ruled a "contract of guarantee," qualifying as financial debt under Section 5(8)(i) of the Code.

The relevant clauses of DTD, 1^st IOM and 2^nd IOM covering these aspects have already been noted by us in detail earlier. We have already noted rival contentions on the issue of ‘covenant to pay’ and its implications on Financial debt in previous discussions.

Now we will see Impact of judgment of Anuj Jain v. Axis Bank (supra) and Rajiv Kumar Jain v. Uno Minda Ltd. (Supra) on Appellant as Financial creditor classification, differing primarily in security provider roles and covenant analysis. In Anuj Jain v. Axis Bank, the Resolution Professional challenged lenders' financial creditor status for mortgages by Jaypee Infratech Ltd. (JIL, CD) securing loans to affiliate Jaypee Infratech Ltd. (JAL). Hon’ble Supreme Court ruled that no financial debt under Section 5(8) of the code, as JIL received no disbursal or time-value consideration and held that mere third-party security without payment covenant doesn't qualify lenders as financial creditors. In contrast in case of Rajiv Kumar Jain v. Uno Minda where Ex-director appealed NCLT's admission of Section 7 petition against Unicast Autotech (CD); Uno Minda claimed financial debt from advances under Business Support Agreement, backed by promoters' guarantees and pledges. This Appellate Tribunal upheld CIRP, classifying debt as financial Debt due to explicit covenants distinguishing from operational debt. We need to appreciate that the key differences, therefore is Clear Covenant to pay, like in present case.

Thus, we find that landmark judgment of Hon’ble Supreme Court of India in Anuj Jain (Supra) with respect to disbursement to third parties without any covenant to pay. In present appeal, we find clear and specific clauses in 2 r/w definitions which binds the Corporate Debtor to satisfy any shortfalls. Thus, with covenant to pay clauses, the present debt can be treated as financial debt. We hold that explicit "covenant to pay" clauses in mortgage deeds elevate the liability to financial debt, distinguishing it from pure security. We only need to examine the deed's language for explicit payment obligations e.g., covenant to pay on demand or shortfall indemnity or any other such connotation. If such expressions are present, the mortgagee qualifies as a financial creditor, also becomes eligible for CoC participation in Section 7 proceedings. We find that in contrast pure third-party security without such covenants remains operational/secured debt only.

In this connection, we are of opinion that once the supplemental indenture has been signed by the Corporate Debtor with these stipulations, we described earlier, we are of the view that taking various clauses of DTD into consideration and where the Corporate Debtor as mortgagor has covenant to pay in Clause 2 and more significantly allowed and allowed himself to bind that no shortfall in security obligations shall be allowed, now at this stage the Appellant cannot keep itself away from the role of obligor. In view of this, we hold that once Corporate Debtor is found to be at par with APCL, the Corporate Debtor is also liable for the debt. We further note that clause 2.3 clearly stipulates that mortgagor confirms that it has read and understood for terms of DTD and agrees to the terms therefore the CD is bound by the same. In our opinion, such clear and unqualified, security for payment on the part of Corporate Debtor as mortgagor, leaves no scope for Corporate Debtor to walk away from the liability towards Appellant in respect of debts.

Based on above detailed discussion, we have no doubt that claim of the Appellant is required to be treated as secured financial debt and not as other secured debt as classified by the Respondent No. 1 (Resolution Professional) and upheld by the Adjudicating Authority in the impugned order.

We also hold that covenant to pay in the mortgaged deed creates an enforceability guarantee. For sake of clarity, we are conscious of the fact that the Corporate Debtor did not receive the disbursement. However, with Corporate Debtor’s covenant to pay through supplemental indenture of mortgage covering earlier DTD, even in respect of loans disbursed by the Appellant to APCL (principal borrower) will tantamount to contract of guarantee under Section 126 of the Indian contract Act, 1872.

We also do not subscribe to the arguments of the Respondent No. 1 & 3 that since in the indenture the Schedule -I specifically provides for specific securities and therefore the rights of the Appellant are restricted to only such mortgaged securities for the simple reason that once the Corporate Debtor as mortgagor covenant to pay of secured obligation as per DTD, such restriction to properties ceased to hold good.

Now, we also examine the Respondents reliance on Clause 2.2 of Indenture of Mortgage to amplify that the ‘covenant to pay’ in the Indenture of Mortgage is restricted only to the payment of default interest or at the highest, payment of value of the Mortgaged Property. We are of opinion that Clause 2.2 of the Indenture of Mortgage indicate that the covenant to repay the entire ‘Secured Obligations’ under the DTD in Clause 2.1. Therefore, Clause 2.2 does not override or restrict the obligations of the Corporate Debtor under Clause 2.1 of the Indenture of Mortgage. Clause 2.2 provides that the Corporate Debtor shall ensure the Secured Obligations do not fall in arrears thereby also undertaking to pay the shortfall amount in lieu of APCL. In fact, Clause 2.2 expressly provides that the said clause shall not limit or affect inter alia enforcement of discharge of the ‘Secured Obligations’ under the DTD by the Appellant i.e. enforcement of guarantee under Clause 2.1 of the IOMs. Clause 2.2 of the IOMs reads as under:

We are of the view that Clauses 2.1 and 2.2 of the Indenture of Mortgage ought to be read jointly and not separately. Reading of Clause 2.2 of the Indenture of Mortgage in isolation and restricting the obligations of the Corporate Debtor to the payment of default interest may perhaps render Clause 2.1 of the Indenture of Mortgage handicapped and overturn the objective of Debenture Trust Deed, First Supplemental Indenture of Mortgage and Second Supplemental Indenture of Mortgage.

We tend to agree that Clause 2.2 specifically stipulate that in event of Mortgagee (Corporate Debtor) fails to discharge secured obligations on respective dates, then the mortgagor (Corporate Debtor) shall pay “default interest” at the rate mentioned in DTD. We behold that had this clause ended only after here, then perhaps the contentions of the Respondent No. 1 & 3 would have been considered favourably. But once we look the later part of Clause 2.2 of Indenture of Mortgage, we find that it clearly stipulates undertaking akin to guarantee that the mortgagor (Corporate Debtor) shall not allow “Secured Obligations” to full in error. Secured Obligations reads as: -

Thus, we tend to agree with the logic of the Appellant that Clause 2.1 r/w Clause 2.2, highlights understanding of the Corporate Debtor to undertake guarantee to satisfy secured obligation towards the Appellant. All these strengthen the case of the Appellant to be treated as secured financial creditor.

At this stage, we also appraise Section 126 of the Indian Contract Act, 1872 which inter – alia, provides few essential requisites of a contract of guarantee like the contract of guarantee must have all the essentials of a contract; there must be an existing debt which should be recoverable; existence of three parties in a contract of guarantee i.e. principal debtor, creditor and surety and there must be promise by the surety to pay the debt in case of default by the principal debtor.

We should refer to the judgment of the Hon’ble Supreme Court in the case of China Development Bank v. Doha Bank QPSC & Ors. [(2025) 7 SCC 729]. The relevant portion of China Development Bank reads as under: -

In this connection, we find that the Indenture of Mortgage, in the present case, has a similar covenant to pay. In the case of China Development Bank (Supra), it is seen that The Security Trustee of China Development Bank claimed status as a financial creditor based on a Deed of Hypothecation (DOH) executed on behalf of China Development Bank pursuant to a Master Security Trustee Agreement, under which the original obligors appointed the Security Trustee to act for the benefit of secured lenders and to accept and enforce security on their behalf. The corporate debtor subsequently executed the DOH in favour of the Security Trustee, hypothecating its assets to secure the facilities and undertaking, through a covenant to pay, to repay the secured facilities to the Security Trustee, with further rights granted to the Trustee to take possession and enforce the security upon default. The Hon’ble Supreme court of India held that the Security Trustee was acting on behalf of and for the benefit of the secured lenders, and that the Corporate Debtor, secured lenders and Security Trustee were parties to the DOH in which the Corporate Debtor undertook to discharge the lenders’ liabilities; accordingly, the arrangement was in the nature of a guarantee under Section 126 of the Contract Act,1872 and constituted a “financial debt” under Section 5(8) of the Code.

We note that in the present case, the Appellant’s claim arises from the security and finance documents, namely the Debenture Trust Deed r/w further Mortgage Deeds (discussed earlier), which constitute a tripartite arrangement between APLL as borrower, the Appellant as debenture trustee for the debenture holders, and the corporate debtor. Under the DTD, the Appellant was appointed to act on behalf of the debenture holders, and Clause 24 provides that security providers, including the Corporate Debtor (discussed earlier) are jointly and severally liable to repay the debentures as co-obligors despite CD was not signatory to original DTD. Further, Clause 2 of the Mortgage Deeds contains a clear covenant to pay by the Corporate Debtor, undertaken in consideration of the debenture holders subscribing to the debentures, thereby obligating the Corporate Debtor to discharge the secured obligations originally owed by the borrowers. As the obligors have defaulted under the DTD, the Corporate Debtor has become jointly and severally liable to repay the secured obligations to the Appellant. Accordingly, we find that the security and finance documents are in the nature of a guarantee under Section 126 of the Contract Act, 1872 and constitute a “financial debt” under Section 5(8) of the Code.

In the present case, Clause 2 of the Mortgage Deeds contains a clear covenant by the corporate debtor to pay the ‘secured obligations’, which are defined as all outstanding amounts relating to the debentures under the Debenture Trust Deed, and Clause 3 records that this covenant was undertaken in consideration of the debenture holders subscribing to the debentures. Accordingly, the Appellant’s claim is founded not merely on the existence of a mortgage but on a contract of guarantee in the nature of a covenant to pay, thereby bringing the Appellant within the definition of a “financial creditor” in terms of the Code. We have also discussed early that disbursal of debt directly to the CD is not a prerequisite for classification as a financial debt under Section 5(8) of the Code.

We have observed that the Respondent No.1 and 3 have relied on various judgments including Anuj Jain (supra) in their pleading before us, however, we find that all of these cited judgements relate to facts where there was no explicit covenant to pay as present in appeal therefore cited cases of Respondent No. 1 and Respondent No. 3 are found to be applicable.

In view of our comprehensive finding as above, we find merit in the Appeal. The Appeal succeeds. The Impugned Order is set aside. I.A, if any, stand closed. No order as to Cost. The case is remanded back to the Adjudicating Authority, to decide the same in accordance with law. The concerned parties are directed to appear before the Adjudicating Authority on 19.03.2026.