J.C. Flowers Asset Reconstruction Pvt. ... vs Mr. Vithal M Dahake Interim Resolution ...

Comp. App. (AT) (Ins) No. 1801 of 2024 & I.A. No. 6576, 6577 of 2024

(Arising out of the Order dated 07.08.2024 passed by the National Company Law Tribunal, Mumbai Bench in I.A No. 1157/MB/2022 in C.P No. 380/2021)

IN THE MATTER OF:

J.C. Flowers Asset Reconstruction Pvt. Ltd. Registered office at Unit No. 203-206, 2nd Floor, Wing A, Inspire BKC, Bandra Kurla Complex, Bandra (East), Mumbai- 400051 Email: chitranshul.sinha@outlook.com ...Appellant Versus Vithal M. Dahake Resolution Professional of Radius Estate Projects Pvt. Ltd. Address at: 603 Neelgiri Apt., Opp Royal Challenge Hotel, Aba Karmarkar Road, Yashodham, Goregaon-East, Mumbai Suburban, Maharashtra, 400063 ...Respondent Present: For Appellant Mr. Abhijeet Sinha Sr. Adv. With Mr. Chitranshul A. Sinha, Mr. Shivam Shorewala, Ms. Rakshita Bhargava & Ms. Esha Sharma, Advocates For Respondent Mr. Amit Arsiwala, Mr. Yash Jariwala & Ms. Neha Arya, Advocates.

Page 1 of 41 JUDGEMENT

( 24 .02.2026)

NARESH SALECHA, MEMBER (TECHNICAL)

1. The present appeal has been filed by the Appellant i.e., J.C. Flowers Asset

Reconstruction Pvt. Ltd, under Section 61 of the Insolvency and Bankruptcy

Code, 2016 ('Code') against the Impugned Order dated 07.08.2024 passed by the

National Company Law Tribunal, Mumbai Bench ("Adjudicating Authority")

in I.A No. 1157/MB/2022 in C.P No. 380/2021.

Mr. Vithal M. Dahake, Resolution Professional of the Corporate Debtor i.e.

Radius Estate Projects Pvt. Ltd., is the Respondent herein.

2. 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.

3. The Appellant stated that it is a company incorporated under the

Companies Act, 2013, and is registered with the Reserve Bank of India as an

Asset Reconstruction Company under Section 3 of SARFAESI Act. The

Appellant further submitted that it is the assignee of the financial assets pertaining

to the Corporate Debtor, which were originally extended by YES Bank Ltd.

4. The Appellant submitted that YES Bank sanctioned a Term Loan of ₹350

Crore to Sumer Radius Realty Pvt. Ltd. (Principal Borrower/SRRPL) vide

Page 2 of 41 Facility Letter no. YBL/MUM/FL/1487/2015-16 dated 31.03.2016 in two

tranches: ₹111 Crore (Term Loan-I) for construction, development, and tenant

settlement costs of the Corporate Debtor's "Avenue 54" project, and ₹239 Crore

(Term Loan-II) for securing various project-related contracts.

5. The Appellant stated that a Loan Agreement was executed on 11.05.2016

and the facilities were secured by a Deed of Mortgage dated 12.05.2016 executed

by the Corporate Debtor (formerly Vishwaroop Realtors Pvt. Ltd.) over 50%

undivided share in freehold land admeasuring approx. 21,774.1 sq. mtrs at Bandra

Village, Mumbai, known as Willingdon Catholic Colony (Santacruz SRA

Project), in favour of IDBI Trusteeship Services Ltd. as Security Trustee for YES

Bank, with the Corporate Debtor undertaking to repay upon default by the

Principal Borrower.

6. The Appellant further submitted that, to comply with the Facility Letter

and Loan Agreement, the Principal Borrower additionally mortgaged its "Ghia

Compound" property, recorded by a Supplemental Deed of Mortgage dated

06.02.2018; the Santacruz SRA Project and Ghia Compound together constitute

the "Avenue 54 Project".

7. The Appellant stated that, despite the prior mortgage in favour of YES

Bank, the Corporate Debtor unlawfully created a second mortgage over the

Avenue 54 Project on 30.07.2018 in favour of Dewan Housing Finance

Corporation Ltd. (now Piramal Capital & Housing Finance Ltd.), which was

objected to by the Appellant and is subject to separate proceedings.

Page 3 of 41

8. The Appellant submitted that the Principal Borrower defaulted in

repayment of principal and interest, leading to classification of the account as

NPA on 31.03.2019 as per RBI guidelines, and recall of the loan by YES Bank.

9. The Appellant submitted that on 29.07.2019, Yes Bank issued a Demand

Notice under Section 13(2) of the SARFAESI Act, to the Principal Borrower and

the Corporate Debtor, demanding repayment of the outstanding amount of Rs.

96,92,58,610/- as on 15.07.2019 along with future interest in respect of Term

Loan-I of Rs. 111 Crore, amongst others.

10. The Appellant stated that despite receipt of the said Demand Notice, neither

the Principal Borrower nor the Corporate Debtor repaid the demanded amount

within the stipulated period of 60 days. The Appellant contended that

consequently, Yes Bank issued a Possession Notice under Section 13(4) of the

SARFAESI Act on 18.10.2019. However, in the meantime, Term Loan-II of Rs.

239 Crore was fully repaid to Yes Bank on 29.08.2020, leaving only Term Loan-

I as the outstanding debt.

11. The Appellant submitted that SBICAP Trustee Company Limited filed an

application under Section 7 of the Code, against the Corporate Debtor before the

Adjudicating Authority, and vide order dated 06.09.2021, the CIRP was

commenced against the Corporate Debtor, with the Respondent herein appointed

as the Interim Resolution Professional (IRP).

12. The Appellant stated that thereafter, the Respondent made a public

announcement inviting claims, pursuant to which Yes Bank submitted its claim

Page 4 of 41 as a financial creditor on 10.11.2021 for a total sum of Rs. 184,35,46,857/-, out

of which Rs. 62,52,24,298/- pertained to the Corporate Guarantee provided by

the Corporate Debtor for the loan extended by Yes Bank to Radius Estate and

Developers Pvt. Ltd., while the remainder related to mortgage obligations under

the Deed of Mortgage, which included a covenant to pay.

13. The Appellant contended that the Respondent, vide email dated

01.12.2021, rejected Yes Bank's claim to the extent it pertained to Term Loan-I of

Rs. 111 Crores advanced to the Principal Borrower, and thereby refused to admit

Yes Bank as a secured financial creditor in that regard. The Respondent also

advised Yes Bank to re-file the claim in the category of "Other Creditor", kept the

claim pending as 'under verification' on the ground that "no funds provided to the

CD", and as on date, the claim continues to be reflected as not admitted in the

claim list.

14. The Appellant submitted that aggrieved by the rejection of its claim, Yes

Bank filed an interlocutory application on 12.04.2022 under Section 60(5) of the

Code read with Rule 11 of the NCLT Rules, 2016, before the Adjudicating

Authority, being IA No. 1157 of 2022 in CP No. 380 of 2021. The Appellant stated

that the Adjudicating Authority, vide order dated 07.09.2022, directed that IA No.

1157 of 2022 shall be heard and adjudicated upon only after the disposal of IA

No. 122 of 2022, which had been filed by the Respondent under Section 12A of

the Code along with Form FA for withdrawal of CP No. 380 of 2021.

Page 5 of 41

15. The Appellant contended that during the pendency of IA No. 122 of 2022,

this Appellate Tribunal granted a stay on the formation of the Committee of

Creditors (CoC) till the disposal of the said IA. The Appellant further submitted

that on 16.01.2023, IA No. 122 of 2022 was withdrawn, and the Adjudicating

Authority passed an order directing the Respondent to form the CoC and resume

the CIRP of the Corporate Debtor.

16. The Appellant submitted that in the meantime, Yes Bank, inter alia,

assigned the financial assets pertaining to the Principal Borrower in favour of the

Appellant vide an Assignment Agreement dated 16.12.2022. The Appellant

submitted that pursuant to the Assignment Agreement dated 16.12.2022, the

Adjudicating Authority vide order dated 22.02.2023 substituted the Appellant as

the applicant in IA No. 1157 of 2022 in place of Yes Bank.

17. The Adjudicating Authority however rejected the Appellant's claim to be

classified as a "secured financial creditor" of the Corporate Debtor and upheld its

treatment as an "other secured creditor".

18. The Appellant submitted that it qualifies as a secured financial creditor

under Section 5(8)(h) and 5(8)(i) of the Code, by virtue of the Mortgage Deeds,

which embody a covenant to pay and constitute a contract of guarantee whereby

the Corporate Debtor unconditionally undertook, as surety, to repay the Secured

Obligations upon default by the Principal Borrower.

19. The Appellant stated that the Term Loan-I of Rs. 111 Crore, sanctioned

vide letter dated 31.03.2016, was expressly for "construction and development

Page 6 of 41 expenses, including balancing tenant settlement costs" of the Corporate Debtor's

"Avenue 54" project, with security including mortgage over the Corporate

Debtor's development rights in the said project.

20. The Appellant contended that under the Development Agreements, the

Corporate Debtor granted development rights over its 50% undivided share in

Avenue 54 to the Principal Borrower in consideration of 1,50,000 sq. ft. of

saleable area, thereby directly benefiting from project completion, as also noted

by the Respondent in the CoC meeting dated 23.01.2023.

21. The Appellant submitted that the Corporate Debtor mortgaged its share in

the project and expressly covenanted to pay the Mortgage Debt upon the Principal

Borrower's default, and that this obligation must be read in conjunction with the

financing documents executed by the Principal Borrower, the Appellant

(creditor), and the Corporate Debtor (surety/mortgagor).

22. The Appellant submitted that the Mortgage Deed constitutes an English

Mortgage under Section 58 of the Transfer of Property Act, 1882, imposing

personal liability on the Corporate Debtor to repay the mortgage debt as per its

terms, thereby entitling the Appellant, as mortgagee, to recover the mortgage

money directly from the Corporate Debtor.

23. The Appellant submitted that the Mortgage Deeds executed between the

Appellant, the Principal Borrower, and the Corporate Debtor fulfil all the

requisites of a contract of guarantee under Section 126 of the Indian Contract Act,

1872, being a tri-partite agreement wherein, vide Clause 3, the Corporate Debtor

Page 7 of 41 undertook an unconditional and unequivocal liability to repay the Secured

Obligations. The Appellant further contended that the "covenant to pay" in the

Mortgage Deeds constitutes a contract of guarantee under Section 126 of the

Indian Contract Act, 1872, and that the liability of the surety is co-extensive with

that of the principal debtor under Section 128 of the Contract Act, 1872 thereof.

24. The Appellant submitted that the relevant terms of the Mortgage Deed,

particularly the definition of "Mortgage Debt" under Schedule II, Clause 3

(Covenant to Pay), Clause 14 (Failure to Pay), and Clause 25 (Liability for

Deficiency), impose personal liability on the Corporate Debtor (Mortgagor) to

repay the Mortgage Debt upon default by the Principal Borrower,

notwithstanding realization of the mortgaged properties.

25. The Appellant contended that the Mortgage Deed qualifies as an English

Mortgage under Section 58 of the Transfer of Property Act, 1882, as expressly

agreed in recital clause (D), and consequently, under Section 68 of the said Act,

the Appellant is entitled to sue for recovery of the mortgage money personally

from the Corporate Debtor.

26. The Appellant submitted that the Principal Borrower defaulted in

repayment of Term Loan-I, leading to its classification as NPA and recall of the

loan, thereby triggering the Corporate Debtor's explicit undertaking under

Clauses 3 and 25 of the Mortgage Deed to discharge the liability, rendering the

Corporate Debtor liable and entitling the Appellant to be treated as a Secured

Financial Creditor.

Page 8 of 41

27. The Appellant stated that under Section 5(8)(h) and 5(8)(i) of the Code, a

financial creditor includes a person to whom a guarantee is provided, and the

liability of the guarantor is co-extensive with the principal borrower under

Section 128 of the Contract Act 1872; thus, direct disbursement to the Corporate

Debtor is not required for the debt to qualify as financial debt.

28. The Appellant contended that the Term Loan-I was sanctioned for

construction, development, and tenant settlement costs of the Corporate Debtor's

"Avenue 54" project, with security including mortgage over development rights

granted by the Corporate Debtor, and that the Corporate Debtor directly benefited

from the arrangement by receiving 1,50,000 sq. ft. of saleable area entitlement,

thereby giving the transaction the commercial effect of borrowing under Section

5(8)(f) of the Code.

29. The Appellant submitted that the Hon'ble Supreme Court in Pioneer Urban

Land and Infrastructure Limited v. Union of India [(2019) 8 SCC 416] held that

the definition of "debt" under Section 5(8) is expansive and not exhaustive. The

Appellant further stated that this Appellate Tribunal in BVS Lakshmi v.

Geometrix Laser Solutions Private Limited [2017 SCC OnLine NCLAT 531] and

Rajeev Kumar Jain v. Uno Minda Limited [2024 SCC OnLine NCLAT 28] has

held that disbursement directly to the corporate debtor is not necessary under

Section 5(8) of the Code, therefore Ld. Adjudicating Authority erred in restricting

its analysis to disbursement alone without considering Sections 5(8)(f), (h) and

(i) of the Code.

Page 9 of 41

30. The Appellant contended that the Principal Borrower and Corporate Debtor

belong to the same group with common promoters, and the covenant to pay under

Clauses 3 and 25 of the Mortgage Deeds satisfies the requisites of Section 5(8) of

the Code.

31. The Appellant submitted that upon issuance of the Demand Notice under

Section 13(2) of the SARFAESI Act to both the Principal Borrower and the

Corporate Debtor for ₹111 crore, the Corporate Debtor accepted the notice

without objection, thereby acknowledging its repayment obligation.

32. The Appellant stated that the Respondent has neither disputed the validity

of the Mortgage Deed nor the covenant to pay therein, nor raised any substantive

objection to the transaction, and arbitrarily rejected the claim without seeking

expert legal advice, contrary to established principles under the Code.

33. The Appellant submitted that the CIRP is at an advanced stage and

admission of the Appellant's claim as a Secured Financial Creditor is essential to

enable active participation in the resolution process and to protect its legal and

financial interests in fairness and equity.

34. The Appellant contended that the Adjudicating Authority's reliance on

Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited vs. Axis

Bank Limited [Civil Appeal Nos.8512-8527 of 2019] is misplaced and erroneous,

as the facts herein are distinguishable due to the presence of an explicit "covenant

to pay" absent in the mortgages considered in that case.

Page 10 of 41

35. Concluding his arguments, the Appellant requested this Appellate Tribunal

to set aside the Impugned Order and allow the present appeal.

36. Per contra, the Respondent refuted all the averments of the Appellant

treating these as baseless and misleading.

37. The Respondent submitted that the Appellant had filed Interlocutory

Application No. 1157 of 2022 before the Adjudicating Authority, seeking

admission of its claim for Rs. 121,83,22,459/- and classification as a Secured

Financial Creditor in respect thereof.

38. The Respondent stated that the Corporate Debtor and Sumer Buildcorp

Private Limited (SBPL) are co-owners of an undivided 50% share each in the

freehold land bearing CTS Nos. H/401, H/402, H/415 to H/438, together with

structures thereon, known as Willingdon Catholic Colony (Willingdon East),

Village Bandra, Mumbai Suburban District, admeasuring 21,774.10 sq. mtrs. The

Respondent further submitted that, for the development of the said land under the

project "Avenue 54", Sumer Radius Realty Private Limited (SRRPL) was

incorporated with directors from the suspended Board of the Corporate Debtor

and from SBPL.

39. The Respondent stated that, as per a Development Agreement dated 29

June 2017 entered into by the Corporate Debtor and SBPL in favor of SRRPL,

development rights over the complete land parcel were transferred to SRRPL. In

return, SRRPL was required to build and hand over residential units equivalent to

Page 11 of 41 1,50,000 sq. ft. of FSI to each of the Corporate Debtor and SBPL, along with a

proportional share of car parking spaces. The Respondent submitted that SRRPL

obtained a term loan of Rs. 350 crores from the Appellant, and for this purpose,

the Corporate Debtor executed a mortgage deed dated 12 May 2016 over the land

as collateral for the said facility.

40. The Respondent submitted that, following the commencement of the

Corporate Insolvency Resolution Process (CIRP) for the Corporate Debtor, the

Appellant lodged its claim in response to the public announcement by the

Resolution Professional. The Respondent further submitted that out of the total

claim, an amount of Rs. 62,52,24,398 relates to the Corporate Guarantee

furnished by the Corporate Debtor for facilities provided by the Appellant to

Radius Estates and Developers Private Limited, which has been accepted by the

Respondent; as a result, the Appellant has been recognized as a Financial Creditor

to that extent within the Committee of Creditors. The Respondent further stated

that the additional claim of Rs. 121,83,22,459 arises from the mortgage executed

by the Corporate Debtor in favor of the Appellant to secure the term loan granted

to Sumer Radius Realty Private Limited.

41. The Respondent submitted that this claim amounting to Rs. 121,83,22,459

does not qualify as 'financial debt' as defined under the Code; therefore, the said

claim has been kept pending for further verification, and the Appellant was asked

to submit or resubmit its claim in the category of an 'other secured creditor', a

direction with which the Appellant has declined to comply.

Page 12 of 41

42. The Respondent submitted that Yes Bank did not disburse any funds

directly to the Corporate Debtor. The mortgage was established purely as

collateral for the term loan disbursed to Sumer Radius Realty Private Limited

(SRRPL), where the Corporate Debtor holds neither shareholding nor any direct

benefit.

43. The Respondent stated that the mortgage arrangement does not amount to

"financial debt" as per Section 5(8) of the Code; hence, the claim of Rs.

121,83,22,459/- cannot be categorized as financial debt, and the Appellant cannot

be regarded as a Financial Creditor of the Corporate Debtor in relation to this

amount.

44. The Respondent further submitted that the Appellant's claim that the Deed

of Mortgage constitutes an absolute guarantee of repayment by the Corporate

Debtor is undermined by its own records. The Loan Recall Notice dated 24 July

2019, the Section 13(2) SARFAESI Notice dated 29 July 2019, and the Section

13(4) SARFAESI Notice dated 18 October 2019 refer to the Corporate Debtor

merely as "Mortgagor" and "Confirming Party", and not as "Guarantor", which

establishes the lack of any explicit or implicit guarantee.

45. The Respondent stated that, as clarified by the Hon'ble Supreme Court in

Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd. (2020) 8 SCC 401, the

provisions of Sections 5(7) and 5(8) of the Code apply to transactions involving

the Corporate Debtor directly; only a party to whom the Corporate Debtor owes

a financial debt can qualify as a Financial Creditor. The Respondent submitted

Page 13 of 41 that no direct disbursement was made by the Appellant the Corporate Debtor. A

third party, to whom no financial debt is owed by the Corporate Debtor, cannot

be deemed its Financial Creditor under Part II of the Code. The Respondent

further submitted that, consistent with the Supreme Court's views in Swiss

Ribbons Pvt. Ltd. v. Union of India and Anuj Jain (supra), a Financial Creditor is

characterized by direct participation in the Corporate Debtor's operations from

evaluating viability and structuring loans to supporting reorganization amid

financial difficulties thereby assuming a protective role in its revival for the

advantage of all stakeholders.

46. The Respondent submitted that the aforementioned rulings clearly

establish that when a Corporate Debtor grants a mortgage to secure the

obligations of a third party, without any direct disbursement to itself, the mortgage

holder while acquiring the status of a secured creditor due to the mortgage can

only be considered an "indirect (other) secured creditor" and not a "direct secured

creditor" eligible to be treated as a "financial creditor". Such a mortgage does not

fall within the scope of "financial debt" under Section 5(8) of the Code, including

its sub-clauses (a) to (i).

47. The Respondent stated that the Hon'ble Supreme Court in New Okhla

Industrial Development Authority v. Anand Sonbhadra has reinforced that

"disbursement" is a fundamental prerequisite for any debt to qualify as such. In

of the judgment, it was held that in the absence of any disbursement of debt or

Page 14 of 41 amounts to the Corporate Debtor, the party concerned cannot be regarded as a

financial creditor under Section 5(8) of the Code.

48. The Respondent submitted that these principles directly apply to the

mortgage granted by the Corporate Debtor to the Yes Bank now Appellant as

assignee of loan from Yes Bank. Even though the mortgage deed includes a

covenant to pay, it does not constitute a Deed of Guarantee; as a result, the claim

founded on this mortgage does not render the Appellant a "Secured Financial

Creditor" but places it in the category of "Other Secured Creditor".

49. The Respondent further stated that it is entirely erroneous to argue that the

mortgage deed qualifies as an English mortgage under Section 58 of the Transfer

of Property Act, 1882, since the key element of an absolute transfer of the

mortgaged property to the mortgagee, with a condition for re-transfer upon

repayment of the mortgage amount, is missing from the arrangement between the

Appellant and the Corporate Debtor.

50. The Respondent submitted that the Adjudicating Authority correctly

determined that the definition of "financial debt" cannot be extended to eliminate

the core elements of "disbursement" against "consideration for the time value of

money". For this reason, the "covenant to pay" cannot be broadly construed to

treat it as an explicit contract of guarantee under Section 126 of the Indian

Contract Act, 1872, especially when no separate guarantee was expressly

executed by the Corporate Debtor in favor of the Appellant.

Page 15 of 41

51. Concluding his arguments, the Respondent requested this Appellate

Tribunal to dismiss the present appeal.

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

Page 16 of 41 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

Page 17 of 41 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

Page 18 of 41 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.

Page 19 of 41

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

Page 20 of 41 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.

Page 21 of 41 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)

Page 22 of 41

63. Thus, it becomes clear that in terms of 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

Page 23 of 41 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 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."

Page 24 of 41

(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. (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

Page 25 of 41 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 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. Page 26 of 41

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.

Page 27 of 41 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

Page 28 of 41 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

Page 29 of 41 payment of the mortgage-money, the transaction is called a simple

mortgage and the mortgagee a simple mortgagee.

(c) Mortgage by 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

Page 30 of 41 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)

Page 31 of 41

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

Page 32 of 41 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

Page 33 of 41 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 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.

Page 34 of 41

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

Page 35 of 41 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

Page 36 of 41 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

Page 37 of 41 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.

Page 38 of 41

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

Page 39 of 41 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.

Page 40 of 41

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.

[Justice Mohammad Faiz Alam Khan] Member (Judicial)

[Naresh Salecha] Member (Technical)

sim

Page 41 of 41