"Covenant to pay" in mortgage deeds constitutes a contract of guarantee and qualifies as financial debt.

The Appellant acts as a debenture trustee for holders of secured optionally convertible debentures worth ₹395 crores issued by Aaditri Constructions Pvt. Ltd. (ACPL) under a Debenture Trust Deed (DTD) dated 03.08.2018

While the Corporate Debtor (CD), Radius Estate Projects Pvt. Ltd., was not an original signatory to the DTD, it subsequently executed a "First Supplemental Indenture of Mortgage" (IOM) on 29.03.2019 and a "Second Supplemental IOM" on 16.04.2019

These IOMs contained a "covenant to pay" where the CD undertook to discharge "Secured Obligations"

Following the CD's entry into Corporate Insolvency Resolution Process (CIRP) on 06.09.2021, the Appellant filed a claim for ₹874 crores as a secured financial creditor

The Resolution Professional (RP) classified the Appellant as an "Other Secured Creditor" rather than a "Financial Creditor," arguing no money was disbursed directly to the CD

The NCLT upheld this classification on 07.05.2024, leading to this appeal

The court applied Section 5(8) of the IBC, which defines "financial debt" as debt disbursed against the consideration for the time value of money, including guarantees

It relied on Section 126 of the Indian Contract Act, 1872, defining a contract of guarantee as a promise to discharge the liability of a third person in case of default

The court heavily cited the Supreme Court precedents in Anuj Jain v. Axis Bank Ltd. regarding the distinction between a pure mortgage and a financial debt

and China Development Bank v. Doha Bank Q.P.S.C., which established that a "covenant to pay" shortfall or deficiency in a security document amounts to a guarantee

It also referenced Rajeev Kumar Jain v. Uno Minda Ltd., clarifying that direct disbursement to the CD is not mandatory if the transaction has the commercial effect of borrowing

The Tribunal reasoned that the statutory language of Section 5(8) does not explicitly require funds to be transferred into the CD's account to constitute "disbursement," provided the transaction carries the "time value of money"

Analyzing the First and Second Supplemental IOMs, the court found that Clause 2.1 (Covenant to Pay) and Clause 2.2 (undertaking not to allow obligations to fall into arrears) must be read jointly

The NCLAT observed that by signing these indentures, the CD voluntarily stepped into the shoes of an "obligor" and assumed a secondary liability to discharge ACPL's debt

Distinguishing this from Anuj Jain, the court noted that the present case involved an express "covenant to pay" rather than a simple third-party mortgage

Applying the China Development Bank principle, the court held that such a contractual undertaking to pay the debt of a third party satisfies the criteria of a guarantee under Section 126 of the Contract Act, thereby falling within the ambit of Section 5(8)(i) of the IBC

It held that: (i) direct disbursement to the CD is not a sine qua non for financial debt

(ii) the "covenant to pay" in the IOMs created an enforceable guarantee

and (iii) the Appellant is a "Secured Financial Creditor" of the CD

The RP was directed to reclassify the claim accordingly, and the matter was remanded to the Adjudicating Authority for further proceedings