Vistra Itcl India Limited vs Vithal Madhukar Dahake

(Arising out of the Order dated 07.05.2024 passed by the National Company Law Tribunal, Mumbai Bench-IV in I.A. 2680 of 2023 filed in C.P. (IB) No. 380 Of 2021)

IN THE MATTER OF:

Vistra ITCL (India) Limited A company having its registered office at the IL&FS Financial Centre, Plot No. C-22, G ...Appellant Block, 3rd floor Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. Versus 1. Vithal Madhukar Dahake Resolution Professional of Radius Estate Projects Private Limited, with office at 405- 408, Hind Rajasthan Building, D.S. Phalke Road, Dadar East, Mumbai-400 014 ...Respondent No. 1

2. Avenue 54 Welfare Association A Society registered under the provision of Societies Registration Act, 1860 and having its registered office at Ultra Mile, 1, Golden Bungalow, Juhu Road, ...Respondent No. 2 Santacruz (W), Mumbai 400 054

3. Omkara Asset Reconstruction Company Private Limited Through its Authorised Signatory Shubhodeep Banerjee Having registered office at: No. 9, M.P. Nagar, First Street, Kongu Nagar Extension, Tirupur, Coimbatore - 641607 ...Respondent No. 3

Page 1 of 71 Present

For Appellants: Mr. Sunil Fernandes Sr. Adv. with Mr. Dharav Shah, Mr. Suyash Goverdhan, Mr. Pranaya Goyal, Ms. Nanki Geewal, Ms. Manasi Joguekar & Ms. Srishti Agarwal, Advocates.

For Respondent: Mr. Amit Arsiwala, Mr. Yash Jariwala & Ms. Neha Arya, Advocates for R-1

Mr. Rhtythm Buaria & Mr. Kinnar Shah, for R-2

Mr. Krishnendu Datta, Sr. Adv. with Mr. Varun Kalra, Mr. Pranav Khanna, Mr. Shahan Vlla & Mr. Harsh Gurbaaz, Advocates for R-3

JUDGEMENT

( 24.02.2026)

NARESH SALECHA, MEMBER (TECHNICAL)

1. The present Company Appeal (AT) (Ins) No. 1110 of 2024 has been filed

by the Appellant i.e. Vistra ITCL (India) Ltd., under Section 61 of the Insolvency

and Bankruptcy Code, 2016 ("Code"), challenging the Impugned Order dated

07.05.2024 passed by the National Company Law Tribunal, Mumbai Bench-IV

("Adjudicating Authority") in I.A. 2680 of 2023 filed in C.P. (IB) No. 380 of

2021.

Vithal Madhukar Dahake, Resolution Professional of the Corporate Debtor

i.e. Radius Estate Projects Pvt. Ltd., is the Respondent No. 1, herein.

Avenue 54 Welfare Association is the Respondent No. 2 herein. The

Avenue 54 Welfare Association (Homebuyers) filed an I.A. No. 5827 of 2024

Page 2 of 71 seeking impleadment in the present appeal. The said I.A was allowed vide order

dated 18.03.2025 and it was impleaded to the present appeal as Respondent No.2.

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

The Omkara Asset Reconstruction Pvt. Ltd. filed an I.A. No. 6627 of 2024

seeking impleadment in the present appeal. The said I.A was partially allowed

vide order dated 13.08.2025 and it was impleaded to the present appeal as

Respondent No.3.

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 contended that it acts as debenture trustee for debenture

holders who subscribed to 3,95,00,000 secured optionally convertible debentures

of face value Rs.100 each, aggregating to Rs.395 crores, issued by Aaditri

Constructions Private Limited ("Company"/ "APCL") under a Debenture Trust

Deed dated 03.08.2018.

4. The Appellant contended that on 03.08.2018, it executed the Debenture

Trust Deed ("DTD") with the Company, Radius & Deserve Builders LLP

(Developer of Project), Mr. Sanjay Chhabria and Mrs. Ritu Chhabria (collectively

"Promotors"), pursuant to which the debenture holders subscribed to the

debentures having a tenure of five years and disbursed Rs.340 crores. The

Page 3 of 71 Appellant was appointed as debenture trustee and the debentures were secured,

inter-alia, by mortgage and guarantees in the nature of "covenant to pay". The

Company and the Promotors, defined as "Obligors", were required to pay the

entire secured obligations to the debenture holders.

5. The Appellant submitted that on 29.03.2019, a First Supplemental

Indenture of Mortgage was executed between the Appellant, the Company and

the Corporate Debtor whereby mortgage was created over the mortgaged property

and the Corporate Debtor undertook an express, unconditional and unequivocal

covenant to pay the entire secured obligations. The Appellant contended that this

covenant was given in consideration of issuance and subscription of the

debentures, thereby making the Corporate Debtor a security provider under the

DTD and a guarantor of the obligations of the obligors. The First Supplemental

IOM formed part of the security and financial documents.

6. The Appellant further submitted that on 16.04.2019, the parties executed a

Second Supplemental Indenture of Mortgage creating mortgage over additional

property and reiterating the Corporate Debtor's covenant to pay. All parties to the

DTD were signatories to this document. The Company subsequently committed

various defaults under the DTD and the Appellant issued an event of default

notice dated 28.07.2021 calling upon the Company to redeem the debentures.

Despite expiry of tenure, the debentures were not redeemed.

7. The Appellant contended that while it was exploring filing a Section 7

petition, SBICAP Trustee Company Limited filed a Section 7 application against

Page 4 of 71 the Corporate Debtor which was admitted on 06.09.2021 and the Respondent No.

1 was appointed as Interim Resolution Professional. The Appellant submitted that

on 02.12.2021, it filed its claim in Form-C for Rs.874,03,27,404/- as a secured

financial creditor on the basis of the guarantee in the nature of covenant to pay

under the mortgage deeds, enclosing all transaction documents. The Respondent

No. 1 sought copies of corporate guarantee and related documents by email dated

04.12.2021, the Appellant reiterated its position and furnished documents again

through emails dated 07.12.2021 and 21.01.2022 to the Respondent No.1.

8. The Appellant contended that the Respondent No. 1 failed to verify the

claims and kept verification in abeyance due to a purported settlement between

the Corporate Debtor and SBICAP Trustee Company Limited. After the

Adjudicating Authority dismissed the settlement application on 28.03.2022 and

revived CIRP, the Appellant again requested verification by emails dated

04.04.2022 and 18.05.2022, however, the Respondent No. 1 informed that further

steps were stayed by appellate order dated 06.04.2022, and verification was again

kept in abeyance.

9. The Appellant submitted that even after disposal of the appeal and vacation

of stay by the Appellate Tribunal on 02.06.2022, the Respondent No. 1 still failed

to verify the claim. Thereafter, when the settlement again failed and was

dismissed on 16.01.2023, the Respondent No. 1 once more sought copies of

guarantee documents by email dated 27.01.2023. The Appellant furnished all

required documents again on 12.02.2023 explaining its position. The Appellant

Page 5 of 71 contended that despite furnishing documents and explanations on three occasions

over two years, the Respondent No. 1 rejected its claim as "secured financial

creditor" by cryptic email dated 06.04.2023 without reasons, while suggesting it

file as "other secured creditor", thereby admitting the transaction and creation of

security interest.

10. The Appellant submitted that it challenged the said rejection by filing I.A.

No. 2680 of 2023 under Section 60(5) of the Code before the Adjudicating

Authority. However, by judgment dated 07.05.2024, the Adjudicating Authority

wrongly upheld the Respondent No. 1's decision. Being aggrieved, the Appellant

has filed the present appeal.

11. The Appellant submitted that the mortgage deeds satisfy all ingredients of

a contract of guarantee under Section 126 of the Indian Contract Act, 1872. These

are tripartite agreements between Financial Creditor, borrower and surety, and

contain an express, unconditional covenant by the Corporate Debtor to repay

secured obligations. The covenant was given in consideration of subscription to

the debentures and therefore constitutes a contract of guarantee.

12. The Appellant submitted that the Adjudicating Authority erred in holding

that the Corporate Debtor's obligation was limited to default interest. Clause 2 of

the mortgage deeds clearly obligates the Corporate Debtor to repay all "secured

obligations", defined as all outstanding amounts relating to the debentures,

including principal and Interim Resolution Professional. The Appellant

contended that its claim based on the mortgage deeds and Debenture Trust Deed,

Page 6 of 71 is a bona fide financial debt arising from a guarantee in the nature of covenant to

pay, whereby the Corporate Debtor undertook liability as surety.

13. The Appellant further submitted that Clause 24 of the DTD makes security

providers jointly and severally liable to discharge obligations, thereby making the

Corporate Debtor jointly and severally liable to repay debenture amounts,

constituting financial debt under the Code. The Appellant relied on Pioneer

Urban Land and Infrastructure Ltd. v. Union of India, [(2019) 8 SCC 416] to

contend that the definition of financial debt under Section 5(8) is inclusive and

expansive and not exhaustive.

14. The Appellant contended that the Corporate Debtor, as security provider,

was a co-obligor jointly and severally liable under the DTD, and co-obligors are

financial creditors as held in State Bank of India v. PE Electronics [2018 SCC

OnLine NCLT 26427] and Zubin Barucha v. Reliance AIF Management

Company [2023 SCC OnLine NCLAT 167]. The Appellant submitted that the

Adjudicating Authority wrongly held that absence of disbursement to the

Corporate Debtor negates financial debt. The Appellant emphasised that

disbursement need not be to the Corporate Debtor itself. Section 5(8)(i) includes

guarantees securing debentures, and judgments in BVS Lakshmi v. Geometrix

Laser Solutions [2017 SCC OnLine NCLAT 531] and Rajeev Kumar Jain v. Uno

Minda Ltd. & Anr. [2024 SCC OnLine NCLAT 28] confirm that disbursement to

the corporate debtor is not necessary. The Appellant contended that the guarantee

was issued in consideration of monies disbursed to the Company, which belongs

Page 7 of 71 to the same group as the Corporate Debtor, thereby satisfying requirements of

Section 5(8) of the Code.

15. Alternatively, the Appellant submitted that Section 5(8)(f) of the Code

covers transactions having commercial effect of borrowing. The debenture

transaction had such effect, and the Corporate Debtor's covenant to pay under the

mortgage deeds, forms part of that borrowing transaction and constitutes financial

debt. The Appellant contended that the Adjudicating Authority did not read the

DTD and mortgage deeds together as part of one transaction and instead relied

selectively on certain provisions. The Appellant submitted that reliance on Anuj

Jain v. Axis Bank [(2020) 8 SCC 401] was misplaced as that case involved

mortgages without covenant to pay. Similarly, reliance on Vistra ITCL v. Dinkar

Venkatsubramanian [2023 SCC OnLine SC 570] and NOIDA v. Anand

Sonbhadra [(2023) I SCC 724] was erroneous as those cases dealt with pledges

and leases without covenants to pay.

The Appellant submitted that recent judgement by Hon'ble Supreme Court of

India in the case of China Development Bank v. Doha Bank Q.P.S.C., [(2025)

7 SCC 729] where the Apex Court held that covenant to pay tantamount to

guarantee and thus its claim are squarely covered as Financial Debt in terms of

Section 5 (8) of the Code.

16. The Appellant contended that the Adjudicating Authority wrongly held

that guarantee was not invoked. During CIRP, existence of financial debt is

sufficient for claim admission; invocation is not a prerequisite. Non-invocation

Page 8 of 71 does not amount to waiver, and non-issuance of Event of Default Notice (EOD)

to the Corporate Debtor is irrelevant. The Appellant submitted that the

Respondent No. 1 never disputed the transaction, mortgage deeds or security

interest. In light of such admissions, the claim ought to have been classified as

secured financial creditor.

17. The Appellant contended that the Adjudicating Authority held that remedy

lies only in enforcement of mortgage. The covenant to pay creates independent

personal liability in addition to mortgage rights. The Appellant further submitted

that the Adjudicating Authority held that covenant to pay is linked only to

mortgaged property and creates no personal liability, which is contrary to Section

126 of the Contract Act and, alternatively, Section 68(1)(a) of the Transfer of

Property Act.

18. The Appellant contended that it had explained and supported its claim with

documents on three occasions over two years and the Respondent No. 1 failed to

properly verify the claim. The Appellant submitted that the mortgage deeds form

part of finance documents and must be read with the DTD. Clause 3 shows that

the covenant to pay was given in consideration of debenture subscription and

cannot be read in isolation. Alternatively, the Appellant contended that under

Section 68(1)(a) of the Transfer of Property Act, a mortgagee has a right to sue

for mortgage money, giving rise to a right to payment constituting a claim under

Sections 3(6) and 3(11) of the Code and thereby a financial debt under Section

5(8) of the Code.

Page 9 of 71

19. The Appellant submitted that the Adjudicating Authority erred by relying

only on Clause 2.2 of the mortgage deeds while ignoring other sub-clauses of

Clause 2. The Appellant contended that nomenclature of document is immaterial

and the covenant to pay clearly creates a guarantee irrespective of whether it is

titled as such. The Appellant submitted that the Respondent No. 1's role is limited

to collating and verifying claims and not adjudicating their admissibility, and the

Adjudicating Authority exercised jurisdiction in upholding such rejection.

20. The Appellant stated that the Adjudicating Authority haserred in holding

that the Corporate Debtor's covenant to pay was limited only to default interest

and did not extend to the principal amount along with normal IRR when Clause

2 of the Mortgage Deeds expressly provide that the Corporate Debtor shall pay

the Secured Obligations. Pertinently, the expression "Secured Obligations" has

been defined in the First Supplemental IOM as "all outstanding amounts in

relation to the Debentures under the Debenture Trust Deed''.

21. Concluding the arguments, the Appellants requested this Appellate

Tribunal to set aside the Impugned Order and allow its appeal.

22. Per contra, the Respondent No. 1, denied all averments made by the

Appellants as misleading and baseless.

23. The Respondent No. 1 submitted that the present Appeal challenges the

Impugned Order dated 7 May 2024 passed by the Adjudicating Authority in I.A.

No. 2680 of 2023 in Company Petition No. 380 of 2021, whereby the

Adjudicating Authority rejected the Appellant's application seeking admission of

Page 10 of 71 its entire claim as a secured financial creditor. The Respondent No. 1 contended

that the Appellant has claimed an amount of Rs. 874,03,27,404/- as on the

insolvency commencement date against the Corporate Debtor, purportedly

arising from a DTD dated 03.08.2018 executed between the Appellant, Aaditri

Constructions Private Limited ("ACPL"), Radius & Deserve Builders LLP, and

the promoters. The Respondent No. 1 submitted that the Appellant's claim is

based on an alleged guarantee said to arise from mortgage deeds containing a

covenant to pay.

24. The Respondent No. 1 submitted that ACPL proposed to raise funds by

issuing 3,95,00,000 optionally convertible debentures of face value Rs. 100 each,

aggregating to Rs. 395 crores, on a private placement basis. ACPL had earlier

entered into a DTD dated 05.09.2017 appointing the Appellant as debenture

trustee, which required execution of a DTD in the prescribed form within the

stipulated time.

25. The Respondent No. 1 submitted that pursuant to this arrangement, a

Debenture Trust Deed dated 03.08.2018 was executed between the Appellant,

ACPL, the developer, and the promoters. The said deed recorded the terms for

issuance of debentures and appointment of the Appellant as debenture trustee. It

was one of the terms of the transaction that the debenture payments and secured

obligations under the debenture documents would be secured by creation of

security by ACPL, the developer, and the promoters in favour of the debenture

trustee.

Page 11 of 71

26. The Respondent No. 1 submitted that a sum of Rs. 340 crores were

disbursed to ACPL in tranches between 04.10.2017 and 04.04.2019 against

issuance of optionally convertible debentures. It was specifically contended that

the Corporate Debtor was neither a party to the original borrowing arrangements

nor did it receive any amount from the Appellant under these disbursals.

27. The Respondent No. 1 submitted that a Supplemental Indenture of

Mortgage dated 29.03.2019 was executed by the Corporate Debtor, along with

other parties, to secure outstanding amounts under the debenture documents by

creation of a first-ranking mortgage in favour of the Appellant over specified

residential units forming part of a project known as "Avenue 54". Subsequently,

a Second Supplemental Indenture of Mortgage dated 16.04.2019 was executed

creating additional mortgage over certain land and rights therein. It was

contended that the Corporate Debtor created security by way of mortgage over its

properties to secure obligations of ACPL under the debenture documents.

28. The Respondent No. 1 contended that the Appellant's claim arises solely

from mortgages created by the Corporate Debtor to secure debentures issued by

ACPL and that such claim does not fall within the definition of "financial debt".

The Respondent No. 1 submitted that the Appellant was requested to file its claim

as an "other secured creditor", but the Appellant refused to do so.

29. The Respondent No. 1 submitted that no amount was ever disbursed by the

Appellant to the Corporate Debtor. The debenture proceeds were disbursed to

ACPL alone. The Corporate Debtor was neither a borrower nor a beneficiary of

Page 12 of 71 the funds and is not a shareholder in ACPL. Accordingly, the transaction does not

satisfy the requirements of Section 5(8) of the Code, and the Appellant cannot be

treated as a financial creditor of the Corporate Debtor. The Respondent No. 1

contended that the Corporate Debtor is neither a corporate guarantor nor a co-

obligor and that the Appellant's interest is protected only to the extent of the

mortgaged properties. The Respondent No. 1 submitted that the Appellant does

not fall within the meaning of "financial creditor" under Section 5(7) of the Code

vis-à-vis the Corporate Debtor.

30. The Respondent No. 1 relied on the judgment of the Hon'ble Supreme

Court in Anuj Jain - Interim Resolution Professional for Jaypee Infratech

Limited vs. Axis Bank Limited, (2020) 8 SCC 401 wherein it was held that where

a corporate debtor creates mortgage to secure the debt of a third party without

receiving disbursement itself, the mortgagee cannot be treated as a financial

creditor. It was submitted that a person having only security interest over assets

of the corporate debtor may be a secured creditor but not a financial creditor, and

inclusion of such persons as financial creditors would defeat the objectives of the

Code.

31. The Respondent No. 1 further relied on the judgment of the Hon'ble

Supreme Court in NOIDA v. Anand Sonbhadra (Supra), wherein it was

emphasised that disbursement to the corporate debtor is an indispensable

requirement for classification as financial debt. It was submitted that any

Page 13 of 71 disbursement made by the Appellant to ACPL may entitle the Appellant to be a

financial creditor of ACPL, but not of the Corporate Debtor.

32. The Respondent No. 1 also relied upon the judgment in Vistra ITCL Ltd.

v. Dinkar Venkatasubramanian (Supra), wherein the Hon'ble Supreme Court

treated Anuj Jain as good law. Further reliance was placed on the decision of this

Appellate Tribunal in Edelweiss Asset Reconstruction Company Ltd. v. Anuj

Jain, Company Appeal (AT) (Insolvency) No.517 & 518 of 2023 which clarified

that certain observations in Vistra were confined to the facts of that case.

33. The Respondent No. 1 contended that even if the mortgage deeds contain

a covenant to pay, the same cannot be equated with a deed of guarantee. A claim

based on mortgage securing a third-party debt does not qualify as a secured

financial debt and can at best be treated as a claim of an "other secured creditor".

The Respondent No. 1 submitted that the Appellant's claim has not been rejected

but has only been classified appropriately.

34. The Respondent No. 1 submitted that in discharge of his statutory duties

under the Code, he has merely collated and verified claims and has not exercised

any adjudicatory function. Reliance was placed on the principles laid down in

Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 that the resolution

professional's role is limited to verification and collation of claims. The

Respondent No. 1 submitted that he requested the Appellant to file its claim under

the correct category based on the documents provided. Page 14 of 71

35. The Respondent No. 1 also submitted that the transaction in question has

been identified as a potentially avoidable transaction, as the Corporate Debtor

mortgaged its properties without receiving consideration and in circumstances

where ACPL and the Corporate Debtor had common directors. It was contended

that the mortgage appears to have been created for the benefit of promoters and

may constitute an undervalued transaction under Section 45 of the Code.

Accordingly, an application has been filed by the Respondent No. 1 before the

Adjudicating Authority in this regard, which is still pending for adjudication.

36. Concluding his arguments, the Respondent No. 1 requested this Appellate

Tribunal to dismiss the appeal with cost.

37. The Avenue 54 Welfare Association/Respondent No. 2 submitted that they

do not wish to file any reply as per order of this Appellate Tribunal dated

01.09.2025. The said order reads as under: -

"Mr. Rhythm Buaria, Advocate has appeared on behalf of Respondent No. 2 and submitted that he does not want to file any reply......."

The Respondent No. 2 did not even file any Written Submission when the appeal was reserved. In generally, thus opposed the appeal.

38. The Respondent No. 3 submitted that it is a secured financial creditor of

the Corporate Debtor, Radius Estate Projects Private Limited and holds a

significant voting share in the Committee of Creditors. The Respondent No. 3

submitted at the outset that the classification of the Appellant as an "Other

Secured Creditor" by Respondent No. 1 and as upheld by the Adjudicating Page 15 of 71 Authority by Order dated 07.05.2024, is correct and in consonance with the

provisions of the Code. The Respondent No. 3 contended that the Appellant's

claim does not qualify as a "financial debt" under Section 5(8) of the Code, as no

funds were ever disbursed to the Corporate Debtor against consideration for the

time value of money and the Corporate Debtor merely created security by way of

mortgage over its assets to secure the obligations of ACPL. The Respondent No.

3 contended that the alleged guarantee provided by the Corporate Debtor is at

best contingent and does not create a direct debtor-creditor relationship with the

Appellant in the nature of financial debt. Reliance was placed on the judgment of

the Hon'ble Supreme Court in Anuj Jain v. Axis Bank Limited (2020) 8 SCC

401, wherein it was held that the essential elements of financial debt include

disbursal of money against time value of money and such disbursal must be to

the corporate debtor itself.

39. The Respondent No. 3 further submitted that the Hon'ble Supreme Court

has held that where a corporate debtor merely creates a mortgage or other security

over its property to secure repayment of a loan availed by a third party, such a

transaction does not constitute a financial debt qua the corporate debtor. In such

circumstances, the consideration for the time value of money flows to the

principal borrower and not to the corporate debtor. Accordingly, the Appellant

cannot be treated as a financial creditor of the Corporate Debtor.

40. The Respondent No. 3 submitted that the mortgage deeds executed by the

Corporate Debtor only create a security interest over its assets. This renders the

Page 16 of 71 Appellant a secured creditor within the meaning of Sections 3(30) and 3(31) of

the Code, but not a financial creditor. The Respondent No. 3 contended that the

classification of the Appellant as an "Other Secured Creditor" is therefore

appropriate, as the debt in question does not fall within the ambit of financial

debt.

41. The Respondent No. 3 submitted that the Appellant has failed to

demonstrate any infirmity or error in the Order dated 07.05.2024 passed by the

Adjudicating Authority, which is well-reasoned and in accordance with the

provisions of the Code and settled judicial precedents. It was contended that the

Appeal is devoid of merit and does not warrant any interference by this Appellate

Tribunal.

42. Concluding its arguments, the Respondent No. 3 requested this Appellate

Tribunal to dismiss the appeal with cost

Findings

43. 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"?

Page 17 of 71 III. Whether the "covenant to pay" in the Mortgage Deed create an

enforceability guarantee or merely secures the mortgage?

IV. Whether a "covenant to pay" for the debt disbursed by the Appellant to a

third party (APCL) undertaken by the Corporate Debtor amounts to a

contract of guarantee under Section 126 of the Indian Contract Act, 1872?

V. Whether the liability of the Corporate Debtor under "covenant to pay" is

only limited to the extent of mortgage provided by it?

Since, all these issues are inter-connected, inter-related and inter-dependent, we

shall deal with these in a conjoint manner on wholistic basis to decide the present

appeal.

44. At this stage, we consider the relevant Section of the Code, Indian Contract

Act and Transfer of Property Act 1882.

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

"3. Definitions.--In this Code, unless the context otherwise requires,--

".....

(6) "claim" means-- (a) a right to payment, whether or not such

right is reduced to judgment, fixed, disputed, undisputed, legal,

equitable, secured or unsecured;

(b) right to remedy for breach of contract under any law for the

time being in force, if such breach gives rise to a right to payment,

whether or not such right is reduced to judgment, fixed, matured,

unmatured, disputed, undisputed, secured or unsecured;

Page 18 of 71 .....

(11) "debt" means a liability or obligation in respect of a claim

which is due from any person and includes a financial debt and

operational debt;"

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

"5. Definitions - (7) "financial creditor" means any person to

whom a financial debt is owed and includes a person to whom such

debt has been legally assigned or transferred to;"

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

5. Definitions - (8) "financial debt" means a debt along with

interest, if any, which is disbursed against the consideration for

the time value of money and includes-- (a) money borrowed

against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit

facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or

the issue of bonds, notes, debentures, loan stock or any similar

instrument;

(d) the amount of any liability in respect of any lease or hire

purchase contract which is deemed as a finance or capital lease

Page 19 of 71 under the Indian Accounting Standards or such other accounting

standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold

on non-recourse basis;

(f) any amount raised under any other transaction, including any

forward sale or purchase agreement, having the commercial effect

of a borrowing;

[Explanation.--For the purposes of this sub-clause,-- (i) any

amount raised from an allottee under a real estate project shall be

deemed to be an amount having the commercial effect of a

borrowing; and (ii) the expressions, "allottee" and "real estate

project" shall have the meanings respectively assigned to them in

clauses (d) and (zn) of section 2 of the Real Estate (Regulation and

Development) Act, 2016 (16 of 2016);]

Section 58 of Transfer of Property Act 1882: -

"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

Page 20 of 71 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) 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:

Page 21 of 71

[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

Page 22 of 71 [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.]

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.

.....

Page 23 of 71 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."

45. We note that the present Appeal has been filed by the Appellant assailing

Impugned Order dated 7th May, 2024 passed by the Adjudicating Authority in

Interlocutory Application No. 2680 of 2023 in Company Petition No. 380 of

2021, inter alia, rejecting the IA preferred by the Appellant seeking admission of

its entire claim as a Secured Financial Creditor, whereby, the Appellant sought

admission of its claim to the tune of Rs. 874,03,27,404/- as on the Insolvency

Commencement date against the Corporate Debtor in relation to Debenture Trust

Deed dated 3rd August, 2018 executed between the Appellant, APCL, Radius and

Deserve Builders LLP, Mr. Sanjay Chhabria and Mrs. Ritu Chhabria. The claim

of the Appellant is arising out of alleged guarantee given by the Corporate Debtor

under Mortgage Deeds in the nature of a covenant to pay.

46. We take into consideration that ACPL proposed to borrow funds by way

of issuing 3,95,00,000 optionally convertible Debentures of face value of Rs. 100

each on private placement basis up to aggregate value of Rs. 395 crores. ACPL

had entered into and executed a Debenture Trustee Agreement (DTD) dated 5th

Page 24 of 71 September, 2017 for appointment of the Appellant as the Debenture Trustee in

respect of the aforesaid borrowing.

47. We note that a Development Management Agreement dated 2lst

September, 2017 was executed between M/s Radius and Deserve Builders LLP

(Developer) and ACPL for appointment of ACPL as the Development Manager

for the purposes of development of a sanctioned project on a portion of larger

land admeasuring 53,192.35 sq. mts. situated at Chembur, Mumbai and APCL

provided a non-interest-bearing deposit of Rs. 50 crores and an interest-bearing

loan of Rs. 345 crores to the Developer to be used for the purposes of the

Sanctioned Project. A subsequent Development Management Agreement dated

3rd August, 2018 replaced the earlier Agreement. It has also been brought out that

ACPL needing capital for satisfying its obligations under the new Development

Management Agreement, approached the Appellant in its capacity as the Trustee

of HDFC Capital Affordable Real Estate Fund - I, acting through its investment

manager HDFC Capital Advisors Limited, for granting financial facilities to

ACPL. Consequently, a DTD dated 3rd August, 2018 was executed between the

Appellant, ACPL, Radius and Deserve Builders LLP (Developer), Mr. Sanjay

Chhabria (Promoter 1) and Mrs. Ritu Chhabria (Promoter 2) to record the terms

and conditions for issuance of Debentures, appointment of Debenture Trustee and

matters connected therewith.

48. One of the terms of the issue of debenture as recorded in Recital 0 of the

said Agreement was that the Debenture Payments and discharge of Secured

Page 25 of 71 Obligations under the said Deed and other transaction documents in respect of

the Debentures shall be secured by ACPL, M/s Radius and Deserve Builders LLP

(Developer), Mr. Sanjay Chhabria (Promoter 1) and Mrs. Ritu Chhabria

(Promoter 2) by creating Security in favour of the Debenture Trustee for the

benefit of the Debenture Holders.

49. We take note of the facts that a Supplemental Indenture of Mortgage dated

29th March, 2019 was executed between the Corporate Debtor (Mortgagor),

Sumer Radius Realty Private Limited ("SRRPL '') (Confirming Party 1), Sumer

Buildcorp Private Limited ("SBPL '') (Confirming Party 2), the Appellant

(Mortgagee), ACPL (Borrower/Issuer) and M/s Radius and Deserve Builders

LLP (Developer) in order to secure all outstanding amounts in relation to the

Debentures under the DTD. It is under the said DTD that the Corporate Debtor

agreed to confirm an exclusive first ranking charge by way of mortgage in favour

of the Appellant.

50. We further take into consideration that a Second Supplemental Indenture

of Mortgage dated 16th April, 2019 was also executed between the Corporate

Debtor (Mortgagor), Radius and Deserve Builders LLP (Developer), ACPL

(Borrower), Mr. Sanjay Chhabria (Obliger 1), Mrs. Ritu Chhabria (Obliger 2),

the Appellant (Mortgagee) in order to further secure the Secured Obligations

under the DTD and in furtherance of the Supplemental Indenture of Mortgage

dated 29th March, 2019. It is under the said Agreement that the Corporate Debtor

has agreed to create by way of exclusive first charge, mortgage and security by

Page 26 of 71 way of registered mortgage in favour of the Appellant on the Additional

Mortgaged Properties.

51. 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.

52. It is the claim of the Appellant that defaulted amount, pertains to the

mortgage created by the Corporate Debtor in favour of the Appellant against

issuance of Debentures by ACPL. Per contra, the Respondent No. 1 pleaded that

the same does not fall within the definition of 'Financial Debt' and at the best

could have been treated as other secured debt.

We are conscious of the fact that no amount has been disbursed to the Corporate

Debtor by the Appellant and the mortgage was created to secured rights of the

Appellant for borrowing by ACPL against issuance of optionally convertible

Debentures which was disbursed to ACPL and not to the Corporate Debtor. It is

the case of the Respondent No. 1 that the said transaction of mortgage does not

fall within the meaning of financial debt as per Section 5(8) of the Code since no

disbursement was made to the Corporate Debtor and therefore the said debt

cannot be treated as a financial debt qua the Corporate Debtor and the Appellant

Page 27 of 71 cannot be treated as a Financial Creditor of the Corporate Debtor to the extent of

the said claim.

53. Thus, we need to deliberate the issue whether the direct disbursement to

the Corporate Debtor is sine qua non under section 5 (8) of the Code. We find

that Disbursement refers to the actual release or payment of money pursuant to a

financial arrangement. Disbursement indicate the outflow of funds by a financial

creditor as part of financial arrangements. It implies that money has been

advanced or made available with an expectation of repayment. Disbursement

therefore is a foundational element in determining whether a transaction qualifies

as "financial debt." However, the pivotal issue is whether such disbursement need

to be directly made only to Corporate debtor or it can be otherwise also. Section

5(8) of the Code defines "financial debt" as:

"A debt along with interest, if any, which is disbursed against the consideration

for the time value of money"

We carefully observe that the Section does not use the word "to the Corporate

Debtor" after word "disbursed". From the statutory language, the essential

ingredients of financial debt are Existence of a debt, Disbursement of money,

Consideration for time value of money and Commercial effect of borrowing.

54. 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

Page 28 of 71 arises whether direct transfer of funds to the Corporate Debtor is an essential

prerequisite for a debt to qualify as financial debt under Section 5(8) of the Code

earlier. The statutory text of Section 5(8) of the Code does not mandate that

disbursement must be made exclusively or directly to the Corporate Debtor. What

the statute requires is disbursement against consideration for time value of

money, not necessarily direct transfer into the Corporate Debtor's account.

Accordingly, it can be held that direct disbursement to the Corporate Debtor is

not a sine qua non. We may add that, however, this becomes a significant

contributory factor to determine the actual nature of transaction between the

Financial Creditor and the Corporate Debtor, which can vary from case to case as

per its own peculiar facts.

55. 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

Page 29 of 71 to be a 'financial debt' in terms of Section 5(8) with its sub- clauses (a) to (i) of

the Code.

56. 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.

57. 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

Page 30 of 71 Respondent No.3 on this point and also find that Adjudicating Authority erred on

this issue in the Impugned Order.

58. The other crucial issue in the appeal is whether the mortgage deed

containing the words "covenant to pay" is to be treated as 'Deed of Guarantee'

and otherwise and whether the Appellant's claim, which is based on mortgage,

fall under the category of 'Secured Financial Creditor' or alternatively would fall

under the category of 'Other Secured Creditor'.

59. At this stage, we take into consideration the relevant portion of the

Debenture Trust Deed

This DEBENTURE TRUST DEED (this "Deed") made at Mumbai on this 3rd day of August, 2018 (the "Execution Date").

BETWEEN VISTRA ITCL (INDlA) LIMITED, a company incorporated under the Companies Act, 1956 and having its registered office at The IL&FS Financial Centre, Plot No. C - 22, G Block, 3rd Floor, Sandra Kurla Complex, Bandra (East), Mumbai 400051, acting in its capacity of debenture trustee in trust and for the benefit of the Debenture Holders and the Debenture Holders' successors and assigns from lime lo lime (hereinafter referred to as the "Debenture Trustee/Trustee", which expression shall, unless repugnant to the context or meaning thereof, include its respective successors and assigns and such other person as may be appointed as the

Page 31 of 71 Debenture Trustee in its place from time to lime in accordance with the provisions of this Deed) of the FIRST PART AND AADITRI CONSTRUCTION PRIVATE LIMITED, a company duly incorporated under the provisions of Companies Act, 1956 having its registered office al ONE BKC, A-Wing, 1401, Plot No.C-66, Sandra Kurla Complex, Sandra (East), Mumbai 400051 (being the investee company and hereinafter referred to as "Company" which expression shall, unless repugnant lo the context or meaning thereof, be deemed lo mean and include its successors in interest and permitted assigns) of the SECOND PART AND RADIUS AND DESERVE BUILDERS LLP, a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 and having its registered office at ONE BKC, A-Wing, 1401, Plot No .C-66, Bandra Kurla Complex, Bandra (East), Mumbai 400 051, hereinafter referred to as the "the Developer" (which expression shall, unless repugnant to the context or meaning thereof, be deemed to mean and include its successors and permitted assigns) of the THIRD PART AND

MR. SANJAY CHHABRIA, Indian inhabitant having his office at ONE BKC, A-Wing, 1401, Plot No.C-66, Bandra Kurla Complex, Bandra (East), Mumbai 400 051, hereinafter referred to as "Promoter 1" (which expression shall, unless

Page 32 of 71 repugnant to the context or meaning thereof, be deemed to mean and include his heirs, executors, administrators and permitted assigns) of the

FOURTH PART AND MRS. RITU CHHABRIA, Indian inhabitant having her office at ONE BKC, A-Wing, 1401, Plot No, C-66, Bandra Kurla Complex, Bandra (East), Mumbai 400 051, herein after referred to as "Promoter "2" (which expression shall, unless repugnant to the context or meaning [hereof. be deemed to mean and include her heirs, executors, administrators and permitted assigns) of the FIFTH PART Promoter 1 and Promoter 2 are, hereinafter, collectively referred to as the "Promoters' and individually as a 'Promoter".

The Company, the Developer and the Promoters are, hereinafter. collectively referred to as the "Obligors". The Debenture Trustee, the Company, the Developer and the Promoters are, hereinafter, collectively, referred to as the "Parties" and individually referred to as a "Party". WHEREAS:

A. The Developer Is proposing to undertake a slum rehabilitation scheme ("the Scheme") on all those pieces and parcels of land ad measuring 1, 62,533.30 square metres, by, inter alia, constructing buildings for the rehabilitation of eligible slum dwellers for project affected persons and buildings for free sale ("Larger Project'), The persons listed

Page 33 of 71 in the First Schedule hereunder written are the present partners of the Developer and their interest in the LLP is as set out in the First Schedule hereunder written. The Larger land is more particularly described in the Second Schedule hereunder written ('Larger Land"). The Larger Land is delineated with a black colour boundary line on the plan annexed hereto and marked as Annexure "A". The Larger Land is owned by the Government of Maharashtra. B. The Scheme is being undertaken by the Developer in a phase wise manner wherein, Phase 1 of the Scheme is being undertaken on a portion of the Larger Land being all that piece and parcel of land admeasuring 53.192.35 square meters ("said land") and Phase 2 of the Scheme is being undertaken on a portion of the Larger land being the Second Land (defined herein below). The said Land is washed in blue colour on the plan annexed hereto and marked as Annexure "A".

C. By and under a Letter of Intent ("LOI") dated 24 th July 2013, issued by the Slum Rehabilitation Authority ("SRA") in favour of, inter alia, the Developer (then known as Wadhwa & Deserve Builders LLP), the SRA has sanctioned the Scheme on a portion or the 1arger Land admeasuring 53,192.35 square meters being the said Land, in the manners and on the Terms and conditions mentioned therein. The project sanctioned under the LOI is hereinafter referred to as "the Sanctioned Project'. A copy of the LOI is annexed hereto and marked as Annexure "B". The details of the Sanctioned Project have beer. provided in Annexure "C" hereto. ........

Page 34 of 71 L. The Company being in need of capital for, inter-alia satisfying its obligations under the New DMA, approached the investor, for making an investment in the Company. Pursuant to discussions, it has been agreed that. subject to the terms and conditions of this Deed and other, Transaction Documents (defined hereinafter) and relying on the representations and Warranties provided by the Obligors, the Investor shall Subscribe to and the Company shall issue and allot the Debentures (as defined hereafter), to the Investor, in accordance, with the terms of this deed.

NOW THIS DEED WITNESSETH AND IT JS HEREBY MUTUALLY AGREED AND DECLARED BY AND BEW\IEEN THE PARTIES HERETO AS UNDER;

1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions In the Deed, (i) capitalised terms defined by inclusion in quotations and/ or parenthesis have the meanings so ascribed; (ii) capitalised-terms used but not denned herein will have the same meaning as ascribed to lh6se terms in the Transaction Documents where these terms have been defined; and (iii) the following terms shall have the following meanings assigned to them herein below:

......

''Debenture Payments" means at any lime all the amounts payable by the Obligors to the Debenture Holders and / or the Debenture Trustee in terms of this Deed and other Transaction Documents, including the following amounts;

(a) Debenture Subscription Amount along with the Reception Amounts, Default Amounts, and all amounts payable to the

Page 35 of 71 Debenture Holders in terms of the Transaction Documents;

(b)all other monies, debts and liabilities of the Company, including indemnities, costs, charges, expenses and fees and interest: accrued or to be accrued by the Debenture Holders as per the terms of the Transaction Documents; and

(c) costs and charges payable to the Debenture Trustee, all the costs, charges, expresses, fees and commission for creation and realisation/enforcement of the Security, legal fees payable for this transaction and all other costs, chargers and expresses, redemption proceeds and other amounts due and payable by the Company in respect of the Debentures.

......

"Debentures", shall mean the First Tranche Debentures, the Second Tranche Debentures, the Third Tranche of Debentures and the Fourth Tranche of Debentures, being secured option a by convertible debentures having a lace value of Rs. 100/- (Rupees One Hundred) each to be issued by the Company at par, in the manner provided in this Deed. The terms and conditions of the Debentures and the manner in which the Debentures will be converted are set out in Annexure "D" of this Deed.

......

"Security Interest" shall refer to any security interest created / to be created for the purposes of securing the obligations of the Company in relation to the Debentures and shall include the Mortgage, Pledge. Corporate Guarantee Personal Guarantee or any other agreement or arrangement having the effect of conferring Security in favour of the Debenture Trustee.

Page 36 of 71 "Security Providers" shall mean the Obligors and shall also include any other person which has created or agreed to create any Security Interest for or in relation to the Debentures and "Security Provider" means each and any one of the Security Providers.

'Security Cover" shall mean the 2.25x security cover lo be maintained in relation to the Investor Sanctioned Project and the Second Investor Sanctioned Project to secure the Debenture Payments and Secured Obligations. "Secured Obligations" shall mean all present and future obligations and liabilities (whether financial, performance or otherwise, whether actual or contingent and whether owed jointly or severally or in any other capacity whatsoever) of the Obligors to the Debenture Holders including in connection with the issue and subscription of the Debentures, the Debenture Payments and the creation and maintenance of Security and all costs and expenses incurred in relation thereto under the Transaction Documents.

"Security Documents" shall mean:

(a) This Deed;

(b) Debenture Trustee Agreement;

(c) Deed(s) of Mortgage;

(d) Personal Guarantee;

(e) Corporate Guarantee;

(f) Escrow Agreements;

(g) Deed of pledge; and

(h) such other document for creating such other Security as may be required by the Debenture Holders / Debenture Trustee from the Obligors

Page 37 of 71 Clause 7 - Security

7.1 The Secured Obligations including the Debenture Payments and the remuneration of the 0ebenlure Trustee, fees, costs, charges, expenses and other monies whatsoever stipulated in this Deed and the Transaction Documents payable by the Company in respect of the Debentures and the performance by the Obligors of their obligations, shall be secured by the Security in favour of the Debenture Trustee.

The Security is as follows:

(i) Exclusive first charge and mortgage by way of a registered English mortgage (without possession) of the Mortgaged Properties (as defined hereinbelow) to be created in the manner provided in this Deed;

(ii) Personal Guarantees from the Promoters;

(iii) Corporate Guarantee from the Developer and such other entities as may be specified by the Debenture Holders;

(iv) Creation of a first end exclusive pledge over the Pledged Shares by execution of the Deed of Pledge and the power of attorney in relation to the pledge;

(v) Rights of the Debenture Trustee under the Escrow Agreements; and

(vi) Such other Security as may be created in favour of the Debenture Trustee from time to time

Clause 24- LIABILITY OF THE SECURITY PROVIDERS

Page 38 of 71 Notwithstanding anything to the contrary contained elsewhere, the Security Providers shall be jointly and severally liable for their obligations specified hereunder.

(Emphasis Supplied)

60. After examination of above relevant clauses of DTD, we find that APCL,

Borrower, Radius LLP/ Developer and the Promoters are collectively referred to

as the "Obligors". "Security Interest" refers to any security interest created for

the purposes securing the obligations of APCL in relation to the HDFC Capital/

Debentures and inter alia include mortgage or any other agreement or

arrangement having the effect of conferring Security in favour of Debenture

Trustee. Further, "Security Providers" mean the Obligors and include any other

person which has created or agreed to create any Security Interest for or in relation

to the Debentures. Similarly, "Secured Obligations" mean all present and future

obligations and liabilities of the Obligors to the Debenture Holders including the

connection with the issue and subscription of the Debentures, the Debenture

Payments under the Transaction Documents. We also note that under clause 7,

Security, inter alia, includes mortgage, and corporate guarantee from Radius LLP/

Developer and such other entities as may be specified by HDFC Capital/

Debenture Holders. Finally, clause 24 stipulated that The Security Providers shall

be jointly and severally liable for their obligations.

61. From above DTD dated 03.08.2018, we observe that it was signed between

the Appellant and ACPL, who was the principal borrower, M/s Radius &

Page 39 of 71 Deserves Builders LLP who is a Developer and incidentally not a Corporate

Debtor along with two promoters Mr. Sanjay Chhabria and Ms. Ritu Chhabria.

62. We observe that the company i.e., APCL, Developer and Promoters were

collectively termed as obligors. At this stage, we may note that the obligor is a

person or entity who owes or undertakes an obligation to another by contract or

other legal documentation in financial arrangements normally an obligor is a

debtor or borrower or someone who has given security and guarantee for the

payment of debt or performance of an obligation. The obligor or co-obligor are

directly involved in the transaction between the debtor and the creditor assuming

the obligations with regard to the repayment of debt. The obligor may also be

called by different names including debtor. On the other hand, the guarantor may

not necessarily be directly involved in the transaction between the main debtor

and the creditor.

63. The star point of the Respondent No. 1 is that the Corporate Debtor was

not a signatory to the DTD and was not an obligor.

64. DTD has given exact definition and meaning of the term security, along

with the security interest, security provider, security cover, security obligation,

security documentation. Security interest includes any security interest created

for the purpose of securing obligations of the company in relation to debentures

and includes, mortgage, pledge with guarantee, personal guarantee for any other

agreement or arrangement having the effect of conferring and security in favour

of the debenture trustee.

Page 40 of 71

65. Similarly, security provider has been referred to as obligor and include any

other person who has created or agreed to create any security interest for or in

relation to debenture. It is important to note that security obligations has been

defined as present and further obligations and liabilities of the obligors to the

debenture holders. From above, it is seen that secured obligations including

debenture payment payable in respect to debentures and performance of obligors

of their obligations have been secured by security in favour of debenture trustee.

66. Various type of security has been defined in clause 7 from (i) to (vi). (i)

stipulates English mortgage (without position of mortgaged properties) and (vi)

stipulates other security as may be created in favour of debenture trustee from

time to time. Thus, we note that Radius Estate Projects Pvt. Ltd. i.e., Corporate

Debtor, which although was not party to above DTD., however, in terms of

Clause 7, it includes any other securities as may be created in favour of debenture

trustee from time to time, the Corporate Debtor may find place in this chain.

Thus, we need to understand whether at any later stage, the Corporate Debtor

became party to offer security in favour of the debenture trustee which falls in the

definition of security under clause 7 of the DTD and resultantly will fall in the

definition of security provider etc.

67. Hence, we need to refer to Supplemental First and Second Indenture of

Mortgage. Now, we will take into consideration the relevant portion of Clauses

of First Supplemental Indenture of. Mortgage dated 29.03.2019

Page 41 of 71 Supplemental Indenture of Mortgage

Page 42 of 71 Page 43 of 71 Page 44 of 71 Page 45 of 71 Page 46 of 71 Page 47 of 71 Clause 2 - Covenant to Pay

Clause 3- Adequate Consideration

Clause 12 (a) (i) - MORTGAGORS' COVENANTS

Page 48 of 71

68. From above First Supplemental Indenture of Mortgage, we observe that

Recital D defines "Secured Obligations" as all outstanding amounts under the

DTD and "Mortgaged Property" mean assets mortgaged in favour of the

Appellant as described in the First Schedule. Further, "Security Interest" inter alia

means any mortgage or any other agreement or arrangement having the effect of

conferring Security in favour of Mortgagee in respect of the Secured Obligation.

We also note that Clause 2, identical in both the IOM's stipulate that in

consideration of the Debenture Holders subscribing to the Debentures, the

Corporate Debtor covenants to and agrees to discharge the Secured Obligations

according to the terms and conditions of the Finance Documents. We have also

noted the definition of "Secured Obligation" and "Finance Documents" in earlier

discussions. We note that, in terms of these clauses, the Corporate Debtor has

confirmed and declared that the Security has been provided in consideration of

the Debenture Holders subscribing to the Debentures and the same is good and

adequate consideration. Further, in terms of Cause 12 (a) (i), the Corporate Debtor

has to discharge the Secured Obligations in accordance with the DTD and other

Finance Documents.

69. We also take into consideration that clause 21 binds the

Mortgager/Corporate Debtor for any deficiencies occurring arising or existing

under finance documents.

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

16.04.2019.

Page 49 of 71

SECOND SUPPLEMENTAL INDENTURE OF MORTGAGE

This SECOND SUPPLEMENTAL INDENTURE OF

MORTGAGE ("said Indenture") executed at Mumbai on this 16th day of April 2019

BETWEEN

RADIUS ESTATE PROJECTS PRIVATE LIMITED, a company within the meaning of Companies Act, 2013 with corporate identity number U45201MH2014PTC258381 and having its registered office at ONE BKC, A Wing 1401, Plot No. C-66, G Block, Bandra Kurla Complex, Bandra (East), Mumbai- 400051 (hereinafter referred to as the "Mortgagor" which expression shall unless repugnant to the context or meaning thereof mean and include their successors-in-title) of the FIRST PART;

AND

RADIUS AND DESERVE BUILDERS LLP, a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 and having its registered office at ONE BKC, A-Wing, 1401, Plot No.C-66, Bandra Kurla Complex, Bandra (East), Mumbai 400 051, hereinafter referred to as the "Developer" (which expression shall, unless repugnant to the context or meaning thereof, be deemed mean and indicate its successors and permitted assigns) of the of the SECOND PART;

AND

Page 50 of 71 AADITRI CONSTRUCTION PRIVATE LIMITED, a

company duly incorporated until the Companies Act, 1956 having its registered office at ONE BKC, A-Wing, 1401, Plot No.C-66, Bandra Kurla Complex, Bandra (East), Mumbai 400051 (being the investee company and hereinafter referred to as "Borrower' which expression shall, unless repugnant to the context or meaning thereof, be deemed to mean and include its successors in interest and permitted assigns) of the THIRD PART;

AND

MR. SANJAY CHHABRIA, Indian inhabitant having his office at ONE BKC, A-Wing, taeifot No.C-66, Bandra Kurla Complex, Bandra (East), Mumbai 400 051, hereinafter referred to as "Obligor 1 (which expression shall, unless repugnant to the context or meaning thereof, be deemed to mean and include his

heirs, executors, administrators and permitted assigns) of the FOURTH PART;

AND

MRS. RITU CHHABRIA, Indian inhabitant having her office at ONE BKC, A-Wing, 1401, Plot No.C-66, Bandra Kurla Complex, Bandra (East), Mumbai 400 051, hereinafter referred to as "Obligor 2" (which expression shall, unless repugnant to the context or meaning thereof, be deemed to mean and include her

heirs, executors, administrators and permitted assigns) of the FIFTH PART;

Page 51 of 71 AND

VISTRA ITCL (INDIA) LIMITED, a company incorporated under the Companies Act, 1956 and having its registered office at the IL&FS Financial Centre, Plot No. C - 22, G Block, 3rd Floor, Bandra Kurla Complex, Bandra (East), Mumbai 400051, acting in its capacity of debenture trustee in trust and for the benefit of the Debenture Holders and the Debenture Holders' successors and assigns from time to time (hereinafter referred to as the "Mortgagee or the Debenture Trustee/Trustee", which expression shall, unless repugnant to the context or meaning thereof, Include its respective successors and assigns and

such other person as may be appointed as the Debenture Trustee in its place from time to time in accordance with the provisions of this Indenture) of the SIXTH PART.

Obligor 1 and Obligor 2 are hereinafter collectively referred to as "Obligors"

The Mortgagor, Developer, Borrower, Obligors and the Mortgagee are individually referred to as the "Part" and collectively referred to as the "Parties".

WHEREAS

under a Debenture Trust Deed dated 3d August 2018 ('said DTD") executed between the RBAN Mortgagee herein (therein referred to as the Debenture Trustee), Borrower (therein referred to as the Company), the Developer (therein referred to as the Developer), Obligor 1 (therein referred to as Promoter 1) and Obligor 2 (therein referred to as

Page 52 of 71 Promoter 2), the parties thereto recorded the terms and conditions for (i) issuance and allotment of the Debentures (as defined therein), (ii) appointment of the Mortgagee as the Debenture Trustee and (iii) matters connected therewith.

Pursuant to the said DTD, by and under an Indenture of Mortgage dated 10hh August, 2018 executed between (i) the Developer (therein referred to as the Mortgagor), (ii) the Borrower (therein referred to as the Borrower), (iii) the Obligors (therein referred to as the Confirming Parties), (iv) Deserve Exim Private Limited, (v) Deserve Builders and Developers (Wadhavali) Private Limited and the (vi) Debenture Trustee and registered with the office of the Sub- Registrar of Assurances under Serial No. KRL4-10020-2018 (hereinafter referred to as the "Original Indenture of Mortgage"), a first and exclusive mortgage and charge was created over the Mortgaged Property (as defined therein) to secure the outstanding amounts in relation to the Debentures. Full stamp duty has been paid on the Original Indenture of Mortgage and therefore, nominal stamp duty Is

being paid on this Second Supplemental Indenture of Mortgage.

......

(g) "Security Interest" shall mean any mortgage, pledge, assignment, deposit arrangement, encumbrance, lien (statutory or other), preference, priority or other security agreement of any kind or nature whatsoever including, without limitation any conditional sale or other title retention agreement, any financing or similar statement or notice filed

Page 53 of 71 under any recording or notice statute; and any designation of loss payees or beneficiaries or any similar arrangement under any contract of insurance or any other similar security interest.

''secured Obligations" shall have the same meaning as ascribed to it under the said DTD and the Transaction Documents;

....

11. COVENANTS BY THE MORTGAGOR, THE BORROWER, THE DEVELOPER AND THE

OBLIGORS

(a) General Undertakings

The Mortgagor, the Borrower, the Developer and the Obligors hereby declare, undertake and covenant as follows:

(i) to discharge the Secured Obligations, in accordance with the said DTD

(ii) Neither the Mortgagor, the Borrower, the Developer nor the Obligors shall modify its constitutional documents until the discharge of all the Secured Obligations except with the prior written approval of the Mortgagee;

(Emphasis Supplied)

71. Thus, we note that Second Indenture of Mortgage was signed by the

Corporate Debtor, APCL and the Appellant. "Security Interest" has been assigned

meaning of any mortgage or Security Agreement of any kind or nature

Page 54 of 71 whatsoever. We also note that "Security Obligations" have been referred to under

DTD and Transaction documents. In terms of, clause 11 (a) (i) makes the

Corporate Debtor bind to discharge the Secured Obligations in terms of DTD and

Finance Documents.

72. From above, it is seen that the Corporate Debtor has signed its

supplemental indenture of mortgage on 29.03.2019 along with Super Radius

Reality as first confirming party and Summer Build Corp. Private Limited as

second confirming party that the Appellant and APCL (principal borrower) and

M/s Radius & Deserves Builders LLP (developer). The Corporate Debtor has

been defined as mortgagor and the indenture of mortgage takes into

consideration, the debenture trust deed DTD dated 03.08.2018 (noted earlier) the

indenture of mortgage dated 10.08.2018 signed earlier amongst the parties.

73. The Corporate Debtor as mortgagor, has categorically stated that to further

secure outstanding amount in relation debentures under DTD (secured

obligations) and have agreed to create charge by way of mortgaged in favour of

mortgagee of the mortgage properties as stipulated in first schedule. The term

finance document has been clearly defined to mean debenture trust deed,

transaction document and all other agreements executed by issuer. Similarly, the

term indenture, project, mortgaged property, project properties etc have also been

defined.

Page 55 of 71

74. The most crucial part of the First supplemental indenture dated 29.03.2019

is clause 2 i.e., covenant to pay. For sake of clarity, the Clause 2 is reiterated as

under: -

2. COVENANT TO PAY 2.1 Pursuant to the Finance Documents and in consideration of the Debenture Holders having.... Debentures, the Mortgagor covenants and agrees with the Mortgagee that the Mortgagor shall discharge the Secured Obligations in accordance with the terms and conditions in the Finance Documents.

2.2 The Mortgagor hereby further covenants with the Mortgagee that in the event the Mortgagor fails to discharge the Secured Obligations on the respective due date as set out in the Debenture Trust Deed, then and in every such case the Mortgagor shall pay default interest at the rate mentioned in the Debenture Trust Deed and it is hereby further agreed that the provisions relating to default in discharge of the Secured Obligations shall not in any way be deemed to authorize the Mortgagor to allow any Secured Obligations to fall in arrears nor shall it in any way interfere with, prejudice, limit or affect the powers of sale or entry or any other rights, authorities, powers or remedies for securing and enforcing the discharge of the Secured Obligations." 2.3 The Mortgagor confirms that it has read and understood the terms of the debenture Trust Deed and agrees to remain bound by the same.

(Emphasis Supplied)

Page 56 of 71

75. It is noted that Clause 2.2 clearly mention the fact that the mortgagor i.e.,

Corporate Debtor covenant and agrees with the mortgagee i.e., the Appellant to

discharge (secured obligations) in accordance with terms and conditions of the

finance documents. We have already noted the terms finance documents and

secured obligations and shall not repeat the same herein again. Clause 2.2 records

the covenant of the mortgagor i.e., Corporate Debtor that in event of mortgagor

failed to discharge security obligations w.r.t. debts as set out in DTD, then the

mortgagor shall pay default interest at the rate of mentioned therein and has

further agreed with the provisions relating to default and discharge of secured

obligations, which shall not be allowed to fall in arrears.

76. From Clause 2.2, it is important to note that the mortgagor has undertaken

liabilities of make payment to default interest in case of default of secured

obligation payable towards Appellant and further and more significantly, the

mortgagor binds himself to the condition that secured obligations will not be

allowed to fall in arrears. This tantamount that mortgagor has assumed the role

of surety or of a guarantor to satisfy the secured obligations towards the

Appellant.

77. We have already noted the term secured obligations has been defined in

the DTD dated 03.08.2018, which means of present and future obligations and

liabilities of the obligors to the debenture holders including debenture payment

etc. Although we have observed that the name of the Corporate Debtor was not

there in the original DTD dated 03.08.2018 however, by signing as a first party

Page 57 of 71 to the first and second supplemental indenture of mortgage dated 29.03.2019 and

dated 16.04.2019 and the Corporate Debtor has stepped into the shoes of the

obligors.

78. We observe that claim of the Appellant has not been denied by the

Respondent No. 1 but has been classified as Other Secured Creditor and not as

Secured Financial Creditor. We further note that the Respondent No. 1 and

Respondent No. 3 pleaded that Covenant to Pay" under Clause 2 of the first

supplemental indenture does not create an Independent Guarantee and argued that

the Appellant's reliance on Clause 2.1 of the Mortgage Deeds to assert the

existence of a standalone guarantee is legally untenable and contextually

incomplete and the "Covenant to Pay" needed be read holistically, comprising

both Clause 2.1 and Clause 2.2 of the Mortgage Deeds. The Respondent No. 1 &

3 further submitted that Clause 2.1 Independently Cannot Constitute a Guarantee

as Clause 2.1 of the Mortgage Deeds records the Corporate Debtor's undertaking

to "discharge the Secured Obligations" in accordance with the DTD. The

Respondent No. 1 and Respondent No. 3 also argued that this clause, when read

independently, does not constitute a guarantee under Section 126 of the Indian

Contract Act, 1872. It is the argument of the Respondent No.1 and Respondent

No.3 that Clause 2.1 of the Mortgage Deed merely records the Corporate Debtor's

undertaking to pay the "Secured Obligations.". Whereas Clause 2.2 immediately

qualifies and limits this undertaking by stipulating that: " ...in the event of failure

to pay the Secured Obligations, the Corporate Debtor shall pay default interest at

Page 58 of 71 the rate mentioned in the said DTD. It is therefore the case of Respondent No. 1

and Respondent No. 3 that Clause 2.2 expressly defines the consequence of non-

compliance with Clause 2.1 and limits the Corporate Debtor's liability to payment

of default interest only, as specified in the DTD. The Respondent No. 1 and

Respondent No. 3 also pleaded that Clause 2.1 is a mere covenant to perform

obligations in accordance with the DTD. It does not contain any language

addressing "failure to pay," "event of default," or any contingency triggered by

non-payment. It is further the case of Appellant that a guarantee, by its very nature

under Section 126 of The Indian Contract Act, 1872, contemplates a promise to

discharge the obligation of another in the event of their default. Clause 2.1

contains no such conditional or default-triggered language.

79. The Respondent No. 1 & 3 also empathetically highlighted distinction from

China Development Bank where the Appellant's reliance on the Hon'ble Supreme

Court's judgment in China Development Bank v. Doha Bank Q.P.S. C., (2025) 7

SCC 729, treating this as misplaced and distinguishable, since in China

Development Bank, the Hon'ble Supreme Court of India interpreted Clause 5(iii)

of the Deed of Hypothecation, which expressly commenced with the language:

"In the event that an event of default has occurred". That clause then obligated

the chargers to "pay on demand ... any shortfall or deficiency" after enforcement

and realisation of security. The Hon'ble Supreme Court held that this latter part

of Clause 5 (iii) amounted to a guarantee precisely because, upon default and

post-realisation shortfall, the corporate debtor agreed to discharge third-party

Page 59 of 71 liabilities. Hence, this clause in China Development Bank was expressly triggered

by an "event of default" and created a specific obligation to pay any shortfall after

enforcement. The Respondent No. 1 and Respondent No. 3 further argued that in

stark contrast, Clause 2.1 in the present case, contains no such default-triggered

language, no reference to "failure to pay," and no commitment to discharge

shortfall amounts.

80. We also take note of the arguments of the Respondent No. 1 & 3 that mere

Co-Obligation to Discharge does not equal to Guarantee: A mere covenant to

"discharge Secured Obligations" (which includes payment of amounts under the

DTD) cannot, without more, be termed a guarantee. Such language reflects, at

best, a primary co-obligation or a performance covenant, not a secondary liability

contingent upon another's default--which is the hallmark of a guarantee under

Section 126 of the Indian contract Act, 1872. The Respondents submitted that

such an interpretation would amount to rewriting the contract rather than

interpreting it. Therefore, the Respondent No. 1 and Respondent No. 3 pleaded

that Mortgage Deeds do not create a guaranteed obligation under Section 126 of

the Indian Contract Act, 1872. The obligation to pay is conditional, enforcement-

linked, and limited to default interest only and not for the whole debt lent to

APCL.

81. Thus, we need to now deep dive into the aspects of covenant to pay: In our

understanding, a covenant to pay is a legally binding promise in a contract where

one party commits to pay a specified sum to another, often on demand or a fixed

Page 60 of 71 date, commonly seen in loan agreements, security documents, promissory notes,

and deeds. It forms the primary obligation in debt instruments, ensuring the

debtor (covenantor) repays principal, interest, or other liabilities to the creditor

(covenantee). Covenant to pay directly enforces payment, surviving even if

security is invalidated. It covers present/future debts, liabilities, or specified

amounts; can be "all monies" clauses. The covenant to pay gains heightened

significance under the Code, particularly in distinguishing financial creditors and

enforcing claims during corporate insolvency resolution processes. A covenant to

pay in security documents like deeds of hypothecation or mortgages deed can

transform a security provider into a financial creditor, if it includes an explicit

promise to discharge liabilities i.e shortfalls.

82. We need to carefully examine clauses for Covenant to pay wrt Section 126

of the Indian Contract Act, 1872. This will also impact the Appellant to qualify

its loans as financial debt under Section 5(8) of the Code even without direct

disbursement to the covenantor. We may also observe that mere security without

such a covenant limits status to creditor, may be even as other secured creditors.

We note that mortgage deed signed by the corporate debtor (mortgagor) with a

"covenant to pay" clause may prima- facie amount to financial debt under Section

5(8) of the Code, provided the covenant creates a promise to discharge the

liability, akin to a guarantee under Section 126 of the Indian Contract Act, 1872.

Section 5(8) of the Code defines "financial debt" as a debt disbursed against the

time value of money, inclusively covering guarantees and obligations from

Page 61 of 71 securing third-party debts when there's an explicit payment undertaking by the

corporate debtor. A mere security interest (like a simple mortgage without

personal liability) does not qualify as financial debt, as clarified by Hon'ble

Supreme Court in Anuj Jain v. Axis Bank (2021) and Phoenix ARC Pvt. Ltd. v.

Ketulbhai Ramubhai (2021), where third-party mortgages without payment

covenants were held to create only "debt" under Section 3(11) of the Code and

not financial debt.

Recently Hon'ble Supreme Court of India rulings emphasize substance

over form stating that a Deed of Hypothecation (similar to a mortgage deed) with

a clause requiring the corporate debtor to pay any shortfall after asset enforcement

was ruled a "contract of guarantee," qualifying as financial debt under Section

5(8)(i) of the Code.

The relevant clauses of DTD, 1st IOM and 2nd IOM covering these aspects have

already been noted by us in detail earlier. We have already noted rival contentions

on the issue of 'covenant to pay' and its implications on Financial debt in previous

discussions.

83. Now we will see Impact of judgment of Anuj Jain v. Axis Bank (supra)

and Rajiv Kumar Jain v. Uno Minda Ltd. (Supra) on Appellant as Financial

creditor classification, differing primarily in security provider roles and covenant

analysis. In Anuj Jain v. Axis Bank, the Resolution Professional challenged

lenders' financial creditor status for mortgages by Jaypee Infratech Ltd. (JIL, CD)

Page 62 of 71 securing loans to affiliate Jaypee Infratech Ltd. (JAL). Hon'ble Supreme Court

ruled that no financial debt under Section 5(8) of the code, as JIL received no

disbursal or time-value consideration and held that mere third-party security

without payment covenant doesn't qualify lenders as financial creditors. In

contrast in case of Rajiv Kumar Jain v. Uno Minda where Ex-director appealed

NCLT's admission of Section 7 petition against Unicast Autotech (CD); Uno

Minda claimed financial debt from advances under Business Support Agreement,

backed by promoters' guarantees and pledges. This Appellate Tribunal upheld

CIRP, classifying debt as financial Debt due to explicit covenants distinguishing

from operational debt. We need to appreciate that the key differences, therefore

is Clear Covenant to pay, like in present case.

Thus, we find that landmark judgment of Hon'ble Supreme Court of India

in Anuj Jain (Supra) with respect to disbursement to third parties without any

covenant to pay. In present appeal, we find clear and specific clauses in 2 r/w

definitions which binds the Corporate Debtor to satisfy any shortfalls. Thus, with

covenant to pay clauses, the present debt can be treated as financial debt. We hold

that explicit "covenant to pay" clauses in mortgage deeds elevate the liability to

financial debt, distinguishing it from pure security. We only need to examine the

deed's language for explicit payment obligations e.g., covenant to pay on demand

or shortfall indemnity or any other such connotation. If such expressions are

present, the mortgagee qualifies as a financial creditor, also becomes eligible for

Page 63 of 71 CoC participation in Section 7 proceedings. We find that in contrast pure third-

party security without such covenants remains operational/secured debt only.

84. In this connection, we are of opinion that once the supplemental indenture

has been signed by the Corporate Debtor with these stipulations, we described

earlier, we are of the view that taking various clauses of DTD into consideration

and where the Corporate Debtor as mortgagor has covenant to pay in Clause 2

and more significantly allowed and allowed himself to bind that no shortfall in

security obligations shall be allowed, now at this stage the Appellant cannot keep

itself away from the role of obligor. In view of this, we hold that once Corporate

Debtor is found to be at par with APCL, the Corporate Debtor is also liable for

the debt. We further note that clause 2.3 clearly stipulates that mortgagor

confirms that it has read and understood for terms of DTD and agrees to the terms

therefore the CD is bound by the same. In our opinion, such clear and unqualified,

security for payment on the part of Corporate Debtor as mortgagor, leaves no

scope for Corporate Debtor to walk away from the liability towards Appellant in

respect of debts.

85. Based on above detailed discussion, we have no doubt that claim of the

Appellant is required to be treated as secured financial debt and not as other

secured debt as classified by the Respondent No. 1 (Resolution Professional) and

upheld by the Adjudicating Authority in the impugned order.

Page 64 of 71

86. We also hold that covenant to pay in the mortgaged deed creates an

enforceability guarantee. For sake of clarity, we are conscious of the fact that the

Corporate Debtor did not receive the disbursement. However, with Corporate

Debtor's covenant to pay through supplemental indenture of mortgage covering

earlier DTD, even in respect of loans disbursed by the Appellant to APCL

(principal borrower) will tantamount to contract of guarantee under Section 126

of the Indian contract Act, 1872.

87. We also do not subscribe to the arguments of the Respondent No. 1 & 3

that since in the indenture the Schedule -I specifically provides for specific

securities and therefore the rights of the Appellant are restricted to only such

mortgaged securities for the simple reason that once the Corporate Debtor as

mortgagor covenant to pay of secured obligation as per DTD, such restriction to

properties ceased to hold good.

88. Now, we also examine the Respondents reliance on Clause 2.2 of Indenture

of Mortgage to amplify that the 'covenant to pay' in the Indenture of Mortgage is

restricted only to the payment of default interest or at the highest, payment of

value of the Mortgaged Property. We are of opinion that Clause 2.2 of the

Indenture of Mortgage indicate that the covenant to repay the entire 'Secured

Obligations' under the DTD in Clause 2.1. Therefore, Clause 2.2 does not

override or restrict the obligations of the Corporate Debtor under Clause 2.1 of

the Indenture of Mortgage. Clause 2.2 provides that the Corporate Debtor shall

ensure the Secured Obligations do not fall in arrears thereby also undertaking to

Page 65 of 71 pay the shortfall amount in lieu of APCL. In fact, Clause 2.2 expressly provides

that the said clause shall not limit or affect inter alia enforcement of discharge of

the 'Secured Obligations' under the DTD by the Appellant i.e. enforcement of

guarantee under Clause 2.1 of the IOMs. Clause 2.2 of the IOMs reads as under:

"2. COVENANT TO PAY 2.1 ...

2.2 The Mortgagor hereby further covenants with the Mortgagee that in the event the Mortgagor fails to discharge the Secured Obligations on the respective due date as set out in the Debenture Trust Deed, then and in every such case the Mortgagor shall pay default interest at the rate mentioned in the Debenture Trust Deed and it is hereby further agreed that the provisions relating to default in discharge of the Secured Obligations shall not in any way be deemed to authorize the Mortgagor to allow any Secured Obligations to fall in arrears nor shall it in any way interfere with, prejudice, limit or affect the powers of sale or entry or any other rights, authorities, powers or remedies for securing and enforcing the discharge of the Secured Obligations."

(Emphasis Supplied)

89. We are of the view that Clauses 2.1 and 2.2 of the Indenture of Mortgage

ought to be read jointly and not separately. Reading of Clause 2.2 of the Indenture

of Mortgage in isolation and restricting the obligations of the Corporate Debtor

to the payment of default interest may perhaps render Clause 2.1 of the Indenture

of Mortgage handicapped and overturn the objective of Debenture Trust Deed,

Page 66 of 71 First Supplemental Indenture of Mortgage and Second Supplemental Indenture

of Mortgage.

90. We tend to agree that Clause 2.2 specifically stipulate that in event of

Mortgagee (Corporate Debtor) fails to discharge secured obligations on

respective dates, then the mortgagor (Corporate Debtor) shall pay "default

interest" at the rate mentioned in DTD. We behold that had this clause ended only

after here, then perhaps the contentions of the Respondent No. 1 & 3 would have

been considered favourably. But once we look the later part of Clause 2.2 of

Indenture of Mortgage, we find that it clearly stipulates undertaking akin to

guarantee that the mortgagor (Corporate Debtor) shall not allow "Secured

Obligations" to full in error. Secured Obligations reads as: -

91. Thus, we tend to agree with the logic of the Appellant that Clause 2.1 r/w

Clause 2.2, highlights understanding of the Corporate Debtor to undertake

guarantee to satisfy secured obligation towards the Appellant. All these

strengthen the case of the Appellant to be treated as secured financial creditor.

92. At this stage, we also appraise Section 126 of the Indian Contract Act, 1872

which inter - alia, provides few essential requisites of a contract of guarantee like

Page 67 of 71 the contract of guarantee must have all the essentials of a contract; there must be

an existing debt which should be recoverable; existence of three parties in a

contract of guarantee i.e. principal debtor, creditor and surety and there must be

promise by the surety to pay the debt in case of default by the principal debtor.

93. We should refer to the judgment of the Hon'ble Supreme Court in the case

of China Development Bank v. Doha Bank QPSC & Ors. [(2025) 7 SCC 729].

The relevant portion of China Development Bank reads as under: -

"45. Clause 5 contains the Chargor's covenants, representations and warranties. Sub-clause (iii) of Clause 5 is material, which reads thus:

... Each of the Chargors further agrees to accept the Security Trustee's account of sales and realizations as sufficient proof of amounts realized and relative expenses and to pay on demand by the Security Trustee any shortfall or deficiency thereby shown....

46. ...

58. .... latter part of clause 5(iii) of DoH indicates that RITL-

Corporate Debtor, who is not the borrower of the appellants, agreed to discharge the liability of the third parties (RCom and RTL) to the appellants in case of default of RCom or RTL. Therefore, the second part of clause 5(iii) of the DoH amounts to a guarantee provided by the Corporate Debtor to the appellants in terms of Section 126 of the Contract Act."

(Emphasis supplied)

94. In this connection, we find that the Indenture of Mortgage, in the present

case, has a similar covenant to pay. In the case of China Development Bank Page 68 of 71 (Supra), it is seen that The Security Trustee of China Development Bank claimed

status as a financial creditor based on a Deed of Hypothecation (DOH) executed

on behalf of China Development Bank pursuant to a Master Security Trustee

Agreement, under which the original obligors appointed the Security Trustee to

act for the benefit of secured lenders and to accept and enforce security on their

behalf. The corporate debtor subsequently executed the DOH in favour of the

Security Trustee, hypothecating its assets to secure the facilities and undertaking,

through a covenant to pay, to repay the secured facilities to the Security Trustee,

with further rights granted to the Trustee to take possession and enforce the

security upon default. The Hon'ble Supreme court of India held that the Security

Trustee was acting on behalf of and for the benefit of the secured lenders, and

that the Corporate Debtor, secured lenders and Security Trustee were parties to

the DOH in which the Corporate Debtor undertook to discharge the lenders'

liabilities; accordingly, the arrangement was in the nature of a guarantee under

Section 126 of the Contract Act,1872 and constituted a "financial debt" under

Section 5(8) of the Code.

95. We note that in the present case, the Appellant's claim arises from the

security and finance documents, namely the Debenture Trust Deed r/w further

Mortgage Deeds (discussed earlier), which constitute a tripartite arrangement

between APLL as borrower, the Appellant as debenture trustee for the debenture

holders, and the corporate debtor. Under the DTD, the Appellant was appointed

to act on behalf of the debenture holders, and Clause 24 provides that security

Page 69 of 71 providers, including the Corporate Debtor (discussed earlier) are jointly and

severally liable to repay the debentures as co-obligors despite CD was not

signatory to original DTD. Further, Clause 2 of the Mortgage Deeds contains a

clear covenant to pay by the Corporate Debtor, undertaken in consideration of the

debenture holders subscribing to the debentures, thereby obligating the Corporate

Debtor to discharge the secured obligations originally owed by the borrowers. As

the obligors have defaulted under the DTD, the Corporate Debtor has become

jointly and severally liable to repay the secured obligations to the Appellant.

Accordingly, we find that the security and finance documents are in the nature of

a guarantee under Section 126 of the Contract Act, 1872 and constitute a

"financial debt" under Section 5(8) of the Code.

96. In the present case, Clause 2 of the Mortgage Deeds contains a clear

covenant by the corporate debtor to pay the 'secured obligations', which are

defined as all outstanding amounts relating to the debentures under the Debenture

Trust Deed, and Clause 3 records that this covenant was undertaken in

consideration of the debenture holders subscribing to the debentures.

Accordingly, the Appellant's claim is founded not merely on the existence of a

mortgage but on a contract of guarantee in the nature of a covenant to pay, thereby

bringing the Appellant within the definition of a "financial creditor" in terms of

the Code. We have also discussed early that disbursal of debt directly to the CD

is not a prerequisite for classification as a financial debt under Section 5(8) of the

Code.

Page 70 of 71

97. We have observed that the Respondent No.1 and 3 have relied on various

judgments including Anuj Jain (supra) in their pleading before us, however, we

find that all of these cited judgements relate to facts where there was no explicit

covenant to pay as present in appeal therefore cited cases of Respondent No. 1

and Respondent No. 3 are found to be applicable.

98. 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 71 of 71