NCLAT (2026.02.24) in J.C. Flowers Asset Reconstruction Pvt. Ltd. vs. Vithal M. Dahake (RP) [(2026) ibclaw.in 218 NCLAT, Comp. App. (AT) (Ins) No. 1801 of 2024 and I.A. No. 6576, 6577 of 20249 ] held that;
Hon'ble Supreme Court in China Development Bank v. Doha Bank Q.P.S.C. & Ors. [(2024) ibclaw.in 340 SC] : (Civil Appeal No. 7298 of 2022) Para 44-60 has conclusively settled the issue that where a document contains a covenant to pay, coupled with a security enforcement mechanism, the arrangement assumes the character of a contract of guarantee, giving rise to a financial debt under Section 5(8) of the Code.
Appellate Tribunal in, Rajeev R. Jain vs Aasan Corporate Solutions Private Limited and another [(2022) ibclaw.in 31 NCLAT] : (2022 SCC Online NCLAT 25), held that where a mortgage deed contains a covenant to pay, it constitutes an English Mortgage under Section 58(e) of the Transfer of Property Act,1872, creating a direct financial liability on the mortgagor and qualifying the creditor as a financial creditor 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.
Thus, we hold that direct disbursement of the Corporate Debtor is not sine qua non.
A mere security interest (like a simple mortgage without personal liability) does not qualify as financial debt, as clarified 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) and not financial debt.
Excerpts of the Order;
Findings
# 52. 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?
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.
# 53. We note that the Appellant had preferred Interlocutory Application No. 1157 of 2022 before the Adjudicating Authority seeking a direction to the Respondent to admit a claim of Rs, 121,83,22,459/- and to treat the Appellant in respect of the said claim also as a Secured Financial Creditor.
# 54. We note that Yes Bank (Original Lender) sanctioned certain loan facilities of Rs 300 crores (Term Loan1 of 111 cr. and Term Loan 2 of 239 cr. vide Facility Letter No. YBL/MUM/FL/1487/2015-16 dated 31.03.2016, Loan Agreement dated 11.05.2016 to secure the Loan of INR 300 Crore, security interests were created vide Deed of Mortgage dated 12.05.2016 executed by the REPPL (Mortgagor) in favour of YES Bank- mortgage over 50% undivided share of all the piece and parcel of freehold land at Bandra along with structures standing thereon known as Willingdon Catholic Colony (Willingdon East), Mumbai together with all the present and future FSI thereon (“Santacruz SRA Project”)- REPPL had also undertaken to repay the Mortgage Debt upon occurrence of an event of default by the Principal Borrower and to Sumer Radius Realty Pvt. Ltd (SRRPL/Principal Borrower) and to secure these loan facilities, various security interests were created by Radius Estate Projects Pvt. Ltd. (“REPPL” / “Corporate Debtor”) (earlier known as Vishwaroop Realtors Pvt. Ltd). Subsequently, Yes Bank, inter alia, assigned the financial assets pertaining to REPPL in favour of the Appellant through an Assignment Agreement dated 16.12.2022.
55. We note that a Supplemental Deed of Mortgage dated 06.02.2018, whereby SRRPL mortgaged its immovable property called ‘Ghia Compound’ in favour of YES Bank, REPPL being party therein. We have been informed that Santacruz SRA & Ghia Compound together form “Avenue 54” project (“Mortgaged Property”).
# 56. We note that the one claim of the Appellant for a sum of Rs.62,52,24,298/- pertains to the Corporate Guarantee provided by the Corporate Debtor against a loan granted by Yes Bank to Radius Estates and Developers Private Limited which has been admitted by the Respondent herein and accordingly, Yes Bank has been admitted to the CoC as a financial creditor to such extent. The second claim of Yes Bank for a sum of Rs. 121,83,22,459 is based on the mortgage created by the Corporate Debtor in favour of Yes Bank against a Term Loan granted to Sumer Radius Realty Private Limited. As far as the said claim to the extent of Rs. 121,83,22,459/- is concerned, the Respondent treated that the same as not falling within the definition of ‘Financial Debt’ and as such, the said claim has been put under verification and the Applicant was requested to file the said claim as ‘Other secured creditor’,
# 57. It is the case of the Respondent that no amount whatsoever has been disbursed to the Corporate Debtor by Yes Bank. The mortgage is created based on a term loan which is disbursed by Yes Bank to SRRPL and not to the Corporate Debtor. Corporate Debtor is not even a shareholder in SRRPL, to whom the money has been disbursed by the Yes Bank and as such the Corporate Debtor is not a beneficiary to the amount claimed by Yes Bank. In addition to the same, the said transaction of mortgage does not fall within the meaning of financial debt as per Section 5(8) of the Code, and therefore the said debt cannot be treated as a financial debt and the Appellant cannot be treated as a Financial Creditor of the Corporate Debtor to the extent of the said claim.
# 58. The main ground of the Respondent is that when the Corporate Debtor creates mortgage to secure payment obligation of a third party, without disbursement of any debt to itself (the Corporate Debtor), the mortgagee, even if becoming a secured creditor because of creation of mortgage, could at the most be described as ‘indirect (other) secured creditor’ and cannot even 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 Section 5(8) with its sub- clauses (a) to (i) of the Code.
# 59. The Respondent submitted that the mortgage was indeed created by the Corporate Debtor in favour of Yes Bank, where the mortgage deed contains covenant to pay, however, yet the same is not a ‘Deed of Guarantee’ and as such, a claim which is based on mortgage does not fall under the category of ‘Secured Financial Creditor’ but would fall under the ambit of ‘Other Secured Creditor’.
# 60. The Respondent strongly pleaded that the mortgage deed does not qualifies as English Mortgage under Section 58 of the Transfer of Property Act, 1882 inasmuch as the essential ingredient of transferring the mortgaged property absolutely to the mortgagee subject to a proviso of re-transfer upon payment of mortgage-money is absent in the transaction between the Appellant and the Corporate Debtor.
# 61. The Respondent submitted that the Adjudicating Authority has rightly observed that the definition of the word ‘financial debt’ cannot be stretched so extensively to the extent that the essential requirements of ‘disbursement’ against the consideration for time value of money’ could be forsaken in the process. It is for the said reasons that the ‘covenant to pay’ cannot be said to be so extensively interpreted so as to conclude that the same is an ex-facie contract of guarantee under Section 126 of the Indian Contract Act, 1872 for the mere reason that no such guarantee is specifically executed by the Corporate Debtor in favour of the Appellant.
# 62. We take into consideration the relevant clauses of the Deed of Mortgage which reads as under:
Clause 3 -COVENANT TO PAY
Pursuant to the Financing Documents and in consideration of the Secured Parties having entered into or agreed to enter into the Financing Document to which it is a party, the Mortgagor covenants and agrees with the Secured Parties that the Mortgagor shall comply with the terms and conditions of the Financing Documents and shall repay the Mortgage Debt in accordance with the relevant Financing Documents, including this Deed.
Clause 4- Grants and Transfers
For the consideration aforesaid and as a continuing Security Interest for the payment, redemption and discharge of the Mortgage Debt hereby secured or intended to be hereby secured, the Mortgagor doth hereby grant, assign by way of Security Interest, convey, assure, charge and transfer unto the Mortgagee for the benefit of the Secured Parties in terms of the provisions contained in Schedule I all right(s), title(s) and interest(s) share of the Mortgagor asserts more particularly described in paragraph 10(A) of Schedule I And in Schedule III (collectively the “Mortgaged Properties”).
Clause 12 (iv)- Additional Covenants
The Mortgagor shall from time to time and at all times during the continuance of these presents and the Security Interest hereby created and whether the Mortgagee acting on behalf of the Secured Parties shall have taken possession of the Mortgaged Properties under the power hereinbefore reserved to it or not, keep the Mortgaged Properties hereby granted, conveyed, assigned and assured or secured or charged or expressed so to be in a good and substantial state of repair and shall duly pay and discharge all dues and charges including without limitation, all the government revenue, rates, rents, taxes, assessments, dues and duties and all charges of a public nature and all other dues, charges and outgoings of governmental or non-governmental or any other nature whatsoever, including those (if any) in arrears payable in respect of the Mortgaged Properties now owned or hereafter acquired.
Clause 14- Failure to pay
It is hereby agreed and declared that if upon the occurrence of an Event of Default, the Mortgagor shall fail to pay to the Secured Parties, the Mortgage Debt or any part thereof in the manner provided herein or in the Financing Documents, then and in that event the Mortgaged Properties hereby granted, conveyed, assured, assigned and charged or expressed so to be shall not be redeemed or be redeemable by the Mortgagor or any other person or persons interested in the equity of redemption thereof except as permitted under Applicable Law.
Clause 25- LIABILITY TO SECURED PARTIES FOR DEFICIENCY
(a) In the event that the monies received by the Mortgagee or the receiver, hereunder are insufficient to discharge the Mortgage Debt, the Secured Parties shall be entitled to recover the same from the Mortgagor as provided; under the Financing Document. Nothing herein contained shall derogate from, qualify or otherwise prejudicially affect the right of the Mortgagee to demand from the Mortgagor, upon the occurrence of an Event of Default, whole or part of the Mortgage Debt notwithstanding that all or some of the Mortgaged Properties may not have been realized.
(b) The Mortgagor shall remain liable to the Secured Parties for any deficiency in relation to the Mortgage Debt.
(Emphasis supplied)
# 63. Thus, it becomes clear that in terms of Clause 3, the Mortgagor/ REPPL has covenanted to pay to the mortgage debt as per finance documents. We further observe that clause 25 make it very clear that the Appellant as Mortgagee is entitled to recover any deficiency in any from the Mortgagor.
# 64. It is the case of the Appellant that these covenants unequivocally establish that the REPPL’s liability is co-extensive with that of the SRRPL under Sections 126 and 128 of the Indian Contract Act, 1872. Section 126 and 128 of the Indian Contract Act, 1872 are reproduced hereunder:
“Section 126. “Contract of guarantee“, “surety”, “principal debtor” and “creditor”. A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
…..
Section 128. Surety’s liability. 2 The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract. Illustration A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and charges which may have become due on it.” (Emphasis supplied)
# 65. We note that the hon’ble Supreme Court in Cosmos Co. Operative Bank Ltd. v. Central Bank of India and Others [(2025) ibclaw.in 68 SC] : (2025 SCC OnLine SC 352), held that:
“51. Deposit of title deeds is one of the many forms of mortgages whereunder there is a transfer of interest in specific immovable property for the purpose of securing payment of money advanced or to be advanced by way of loan. The three requisites for a valid mortgage are, (i) debt; (ii) deposit of title deed; and (iii) an intention that the deed shall operate as security for the debt. In other words, when the debtor deposits with the creditor title deeds of his property with an intent to create a security, the law implies a contract between the parties to create a mortgage and no registered instrument is required under Section 59 of the Act, 1872 as in other classes of mortgage. It is essential to bear in mind that the essence of a mortgage by deposit of title deeds is the actual handing over by a borrower to the lender of documents of title to immovable property with the intention that those documents shall constitute a security which will enable the creditor ultimately to recover the money which he has lent. Whether there is an intention that the deed shall be security for the debt is a question of fact to be decided in each case on its own merits.”
(Emphasis supplied)
# 66. It has been brought out that hon’ble Supreme Court in China Development Bank v. Doha Bank Q.P.S.C. & Ors. [(2024) ibclaw.in 340 SC] : (Civil Appeal No. 7298 of 2022) Para 44-60 has conclusively settled the issue that where a document contains a covenant to pay, coupled with a security enforcement mechanism, the arrangement assumes the character of a contract of guarantee, giving rise to a financial debt under Section 5(8) of the Code. In the said case, Clause 2 of the Deed of Hypothecation (DOH) expressly contained a “covenant to pay”, whereby the Corporate Debtor undertook to repay the secured facilities to the Security Trustee. Further, Clause 5(iii) empowered the Security Trustee to take possession of and enforce the hypothecated assets upon default. Hon’ble Supreme Court held that the Security Trustee was acting on behalf of and for the benefit of the Secured Lenders, and consequently, the Corporate Debtor, Secured Lenders, and Security Trustee were parties to a composite arrangement wherein the Corporate Debtor had undertaken to discharge the liability of the Secured Lenders. Such undertaking was held to be in the nature of a guarantee under Section 126 of the Indian Contract Act, 1872, and therefore constituted a “financial debt” under Section 5(8) of the Code.
# 67. If we apply the above ratio to the present case, the Deed of Mortgage dated 12.05.2016, contains a clear “Covenant to Pay” (Clause 3), whereby the Corporate Debtor has undertaken to repay the Mortgage Debt in accordance with the financing documents. In addition, thereto, the Mortgage Deed confers upon the Mortgagee the right to enforce the mortgaged properties upon default, and further provides that the Corporate Debtor shall remain personally liable for any deficiency even after enforcement. Similarly, we observe that Deed of Mortgage dated 12.05.2016 in clause D expressly stipulates that: “The Mortgagor and the Mortgagee have agreed that the mortgage and charge on the Mortgaged Properties shall be by way of a legal mortgage in English form by way of a registered mortgage deed being these presents.” Thus, the Deed of Mortgage dated 12.05.2016 qualifies as an English Mortgage under Section 58(e) of the Transfer of Property Act, 1872. Consequently, under of the Deed of Mortgage dated 12.05.2016, the Appellant is entitled to recover the mortgage money directly from the REPPL in the event of default by the Principal Borrower. It is worth noting that Clause 8 Deed of Mortgage dated 12.05.2016 further amplify Mortgagee’s authority to reassign, re-convey, or re-transfer upon repayment, affirming that all essential attributes of an English Mortgage are satisfied. We do not agree to the pleading of the Respondent No on this issue noted earlier.
# 68. We also take into consideration that this Appellate Tribunal in, Rajeev R. Jain vs Aasan Corporate Solutions Private Limited and another [(2022) ibclaw.in 31 NCLAT] : (2022 SCC Online NCLAT 25), held that where a mortgage deed contains a covenant to pay, it constitutes an English Mortgage under Section 58(e) of the Transfer of Property Act,1872, creating a direct financial liability on the mortgagor and qualifying the creditor as a financial creditor under Section 5(8) of the Code.
# 69. It is noted that SRRPL was sanctioned a Term Loan of Rs. 350 Crores by Yes Bank, of which Rs. 111 Crores was disbursed towards construction and development expenses, including balancing tenant settlement costs for the REPPL’s project “Avenue 54.” Thereby, in a way REPPL directly benefited from such disbursement and thus derived a commercial effect of borrowing. This is substantiated by the Development Agreements executed between the REPPL and Sumer Buildcorp Pvt. Ltd. (“SBPL”), whereby development rights over 50% of the “Avenue 54” project were transferred to the SRRPL in exchange for 1,50,000 sq. ft. of saleable area. Hence, the REPPL is the direct beneficiary of the loan proceeds. Accordingly, the Appellant’s claim arises from a transaction having the commercial effect of borrowing and falls within Sections 5(8)(f), 5(8)(h), and 5(8)(i) of the Code.
# 70. We further take into consideration the co-extensive liability of guarantor and principal borrower is well-settled under Section 128 of the Indian Contract Act, 1872 and reinforced by the Hon’ble Supreme Court in Laxmi Pat Surana v. Union Bank of India, (2021) 8 SCC 481, where it was held that the guarantor’s obligation is co-extensive and coterminous with that of the principal borrower. Default by the borrower constitutes default by the guarantor, rendering the guarantor a “corporate debtor” under Section 3(8) of the Code. Thereby REPPL, being the guarantor, is liable for the default committed by SRRPL, and the Appellant is thus entitled to classification as a secured financial creditor.
# 71. It has been pleaded by the Appellant that the Financial Statements for FY 2021–22 of the REPPL, were obtained by the Appellant from the Respondent No.1 Resolution Professional which reveal that SRRPL is a related party of REPPL and Mr. Sanjay Chhabria holds 75% shareholding in the REPPL and 25% in SRRPL, establishing that both entities are part of the same group. This relationship further reinforces that the loan to SRRPL was disbursed for the direct benefit of the REPPL, thereby having the commercial effect of borrowing under Section 5(8)(f) of the Code.
# 72. We observe that the reliance placed by the Adjudicating Authority and Respondent on Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, may not be correct, as the said judgment pertained to a mere mortgage without a covenant to pay. In contrast, the present case involves an express covenant to pay, creating a direct liability on the Corporate Debtor, which will be covered by the judgment delivered by the Hon’ble Supreme Court in case of China Development Bank (supra), in paragraph 31 of the judgment.
# 73. We also observe that, similarly, reliance on New Okhla Industrial Development Authority v. Anand Sonbhadra is misplaced, as the instant case involves an explicit contractual guarantee and English Mortgage, both satisfying the statutory requirements for financial debt.
# 74. At this stage we will look into Section 58 of Transfer of Property Act 1872- “Mortgage”, “mortgagor”, “mortgagee”, “mortgage-money” and “mortgage- deed” defined.
(a) A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being arc called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed.
(b) Simple mortgage.—Where, without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage-money, and agrees, expressly or impliedly, that, in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money, the transaction is called a simple mortgage and the mortgagee a simple mortgagee.
(c) Mortgageby conditional sale.—Where the mortgagor ostensibly sells the mortgaged property— on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale and the mortgagee a mortgagee by conditional sale:
[Provided that no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document which effects or purports to effect the sale.]
(d) Usufructuary mortgage.—Where the mortgagor delivers possession 1 [or expressly or by implication binds himself to deliver possession] of the mortgaged property to the mortgagee, and authorises him to retain such possession until payment of the mortgage-money, and to receive the rents and profits accruing from the property 2 [or any part of such rents and profits and to appropriate the same] in lieu of interest, or in payment of the mortgage -money, or partly in lieu of interest 3 [or] partly in payment of the mortgage-money, the transaction is called an usufructuary mortgage and the mortgagee an usufructuary mortgagee.
(e) English mortgage. —Where the mortgagor binds himself to re-pay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage.
(f) Mortgage by deposit of title-deeds.—Where a person in any of the following towns, namely, the towns of Calcutta, Madras, 2 [and Bombay], 3*** and in any other town which the 4 [State Government concerned] may, by notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immoveable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title-deeds
(g) Anomalous mortgage. —A mortgage which is not a simple mortgage, a mortgage by conditional sale, an usufructuary mortgage, an English mortgage or a mortgage by deposit of title–deeds within the meaning of this section is called an anomalous mortgage.]
(Emphasis supplied)
# 75. 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.
# 76. 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.
# 77. 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.
# 78. We find that Disbursement refers to the actual release or payment of money pursuant to a financial arrangement. Disbursement indicates 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”
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.
# 79. 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. As also noted by us, 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.
# 80. We will also refer to the judgement in the case of Rajeev Kumar Jain v. Uno Minda Limited [(2024) ibclaw.in 72 NCLAT] : [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.
# 81. 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.
# 82. 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 especially English Mortgage, fall under the category of ‘Secured Financial Creditor’ or alternatively would fall under the category of ‘Other Secured Creditor’.
# 83. We observe that claim of the Appellant has not been denied by the Respondent but has been classified as Other Secured Creditor and not as Secured Financial Creditor. We further note that the Respondent pleaded that Covenant to Pay” under Clause 3 of Mortgage Deed does not create an Independent Guarantee and argued that the Appellant’s reliance on Clause 3 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. The Respondent further submitted that Clause 3 independently cannot constitute a Guarantee. The Respondent also argued that this clause does not constitute a guarantee under Section 126 of the Indian Contract Act, 1872. It is the argument of the Respondent that Clause 3 of the Mortgage Deed merely records the Corporate Debtor’s undertaking to repay the mortgage debt in accordance with relevant financing documents including this deed. It does not contain any language addressing “failure to pay,” “event of default,” or any contingency triggered by non-payment. 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 3 contains no such default-triggered language.
# 84. The Respondent 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 further argued that in stark contrast, Clause 3 in the present case contains no such default-triggered language, no reference to “failure to pay,” and no commitment to discharge shortfall amounts.
# 85. We also take note of the arguments of Respondent that mere Co-Obligation to Discharge does not equal to Guarantee: A mere covenant to pay 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. Therefore, the Respondent 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 mortgaged securities only and not for the whole debt lent to Principal Borrower.
# 86. Thus, now we need to 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 IBC, 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.
# 87. 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 will typically 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 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) and not financial debt.
Recently Hon’ble Supreme Court of India rulings emphasize substance over form in 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.
We hold that explicit “covenant to pay” clauses in mortgage deed elevate the liability to financial debt, distinguishing it from pure security. Pure third-party security without such covenants remains operational/secured debt only. The relevant clauses of Mortgage Deed covering these aspects have already been noted by us in detail earlier. In view of all above including judicial pronouncements, we are of opinion that the debt of the Appellant are to be treated as Secured Financial Debt and the Appellant is to be treated as Secured Financial Creditor.
# 88. Another issue we need to look into as whether Appellant’s Mortgage Deed is an English Mortgage or otherwise. In Raj Kishore (Dead) By LRS v. Prem Singh & Ors. Civil Appeal No. 7471 of 2003, the Hon’ble Supreme Court of India held that Section 58(e) of the Transfer of Property Act, 1882, for a transaction to constitute an English mortgage the few essential conditions must be satisfied, which may inter alia include the Mortgagor must bind himself to re-pay the mortgage money on a certain date, the property mortgaged should be transferred absolutely to the Mortgagee and such absolute transfer should be made subject to proviso that the Mortgagee shall re-convey the property to the Mortgagor upon payment by him of the mortgage money on the date the Mortgagor binds himself to pay the same.
# 89. As regard to issue of English Mortgage, we note that Deed of Mortgage dated 12.05.2016 in clause D expressly stipulates that:
“The Mortgagor and the Mortgagee have agreed that the mortgage and charge on the Mortgaged Properties shall be by way of a legal mortgage in English form by way of a registered mortgage deed being these presents.” (Emphasis supplied)
# 90. Thus, we are of opinion that the Deed of Mortgage dated 12.05.2016 qualifies as an English Mortgage under Section 58(e) of the Transfer of Property Act, 1872. The Appellant is entitled to recover the mortgage money directly from the Corporate Debtor in the event of default by the Principal Borrower. It is reiterated that Clause 8 Deed of Mortgage dated 12.05.2016 stipulate the Mortgagee’s authority to reassign, re-convey, or re-transfer upon repayment, affirming that all essential attributes of an English Mortgage are satisfied.
# 91. Thus, on the issue of English Mortgage, we tend to agree with the arguments of the Appellant and at the same time do not support logic of the Respondent on this issue.
# 92. We consider that a Deed of Mortgage dated 12.05.2016 and Supplementary Deed of Mortgage dated 06.02.2018 executed between the Appellant, SRRPL and REPPL, whereby the REPPL expressly undertook liability for repayment of the Secured Obligations. The Deed of Mortgage dated 12.05.2016 contains a “Covenant to Pay” clause, satisfying the ingredients of an English Mortgage under Section 58 of the Transfer of Property Act, 1882 (“TPA”), rendering the REPPL liable to repay the mortgage debt.
# 93. 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.
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