### Direct "Covenant to Pay" in Mortgage Deeds Constitutes Financial Debt Under the IBC

The Appellant acted as a debenture trustee for debentures worth Rs. 395 crores issued by Aaditri Constructions Private Limited (ACPL).

The Corporate Debtor (CD), Radius Estate Projects Pvt. Ltd., was not an original signatory to the Debenture Trust Deed (DTD).

The CD 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 admission into CIRP, the Appellant filed a claim for Rs. 874 crores as a "secured financial creditor."

The Resolution Professional (RP) rejected this classification, treating the Appellant as an "other secured creditor" on the grounds that no money was disbursed directly to the CD and the CD was a third-party security provider.

The NCLT upheld the RP's decision, leading to this appeal.

1. Whether disbursement of debt directly to the Corporate Debtor is a prerequisite for classification as "financial debt" under Section 5(8) of the IBC.

2. Whether a "covenant to pay" for debt disbursed to a third party (ACPL) undertaken by the CD amounts to a contract of guarantee under Section 126 of the Indian Contract Act.

3. Whether the Appellant qualifies as a "Financial Creditor" under Section 5(7) read with Section 5(8) of the IBC.

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 amounts raised via debentures and liabilities in respect of 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 Tribunal further applied the precedent from *China Development Bank v. Doha Bank Q.P.S.C.* (2025), which established that a covenant to pay shortfall or deficiency in security documents amounts to a guarantee.

It distinguished *Anuj Jain v. Axis Bank* (2020), noting that while a mere mortgage without a payment covenant does not constitute financial debt, the presence of an express "covenant to pay" alters the legal status.

The Tribunal reasoned that Section 5(8) of the IBC does not use the words "to the Corporate Debtor" after "disbursed," meaning direct transfer of funds to the CD is not a sine qua non for financial debt.

While the CD was not in the original DTD, by signing the Supplemental IOMs, it specifically undertook a "covenant to pay" the "Secured Obligations" defined in the DTD.

The Tribunal rejected the RP’s narrow reading of Clause 2.2, holding that Clause 2.1 (undertaking to discharge obligations) and Clause 2.2 (undertaking not to allow obligations to fall into arrears) must be read jointly.

Applying the *China Development Bank* ratio, the Tribunal found that this unconditional undertaking to ensure the debt is satisfied constitutes a contract of guarantee under Section 126 of the Contract Act.

Consequently, the liability assumed by the CD towards the Appellant, despite being for a third party’s borrowing, possesses the commercial effect of a borrowing and falls under the inclusive definition of financial debt.

The Appellant was declared a "Secured Financial Creditor."

The NCLAT set aside the Impugned Order, allowed the appeal, and remanded the matter to the Adjudicating Authority for further proceedings in accordance with this classification.