### Direct Covenant to Pay in Third-Party Mortgage Constitutes a Guarantee and Qualifies as Financial Debt Case Summary: 1. Context: The Appellant (Debenture Trustee) filed a claim against the Corporate Debtor (CD) after it failed to satisfy obligations under a Debenture Trust Deed (DTD). Although the CD was not a signatory to the original DTD, it executed Supplemental Indentures of Mortgage containing a "Covenant to Pay." The Resolution Professional and the NCLT classified the Appellant as an "Other Secured Creditor," arguing that no funds were disbursed directly to the CD. 2. Key Legal Issues: * Whether direct disbursement to the Corporate Debtor is a prerequisite for "Financial Debt" under Section 5(8) of the IBC. * Whether a "Covenant to Pay" in a mortgage deed transforms a security interest into a contract of guarantee. 3. Tribunal’s Holding: * Disbursement: Direct disbursement to the CD is not a *sine qua non* for financial debt; it is sufficient if money is disbursed against the time value of money for the CD's benefit or via a guarantee. * Covenant to Pay: The "Covenant to Pay" in the Supplemental Mortgages created a primary, unconditional obligation to discharge "Secured Obligations." This transformed the CD into a surety under Section 126 of the Indian Contract Act. * Classification: Relying on the Supreme Court’s ruling in *China Development Bank v. Doha Bank*, the Tribunal held that a mortgage containing an express covenant to pay shortfall or debt constitutes a guarantee. Consequently, the Appellant is a Secured Financial Creditor, not merely an "other" secured creditor. 4. Conclusion: The Appellate Tribunal set aside the NCLT order and directed the claim to be admitted as a Secured Financial Debt.

The Appellant, acting as a debenture trustee, entered into a Debenture Trust Deed (DTD) dated 03.08.2018 with Aaditri Constructions Pvt. Ltd. (ACPL/Borrower) for the issuance of debentures worth Rs. 395 crores.

While the Corporate Debtor (CD), Radius Estate Projects Pvt. Ltd., was not an original signatory to the DTD, it later 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," wherein the CD agreed to discharge the "Secured Obligations" (defined by the DTD).

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) classified the Appellant only as an "Other Secured Creditor" on the grounds that no money was disbursed directly to the CD and the CD was not a guarantor.

The NCLT upheld the RP's classification via an order dated 07.05.2024, prompting 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 the "covenant to pay" in the Mortgage Deeds constitutes a contract of guarantee under Section 126 of the Indian Contract Act, 1872, thereby making the debt "financial debt" under Section 5(8)(i).

3. Whether the liability of the Corporate Debtor is limited only to the value of the mortgaged property.

The Court applied Section 5(8) of the Insolvency and Bankruptcy Code (IBC), which defines "financial debt" as a debt disbursed against the consideration for the time value of money, including guarantees.

It relied on Section 126 of the Indian Contract Act, 1872, regarding contracts of guarantee.

The Tribunal distinguished Anuj Jain v. Axis Bank (2020), which held that a mere mortgage without a personal covenant to pay does not create a financial debt.

It further relied on China Development Bank v. Doha Bank Q.P.S.C. (2025), which established that an explicit covenant to pay for a third party’s default in a security document constitutes a guarantee.

Additionally, Rajeev Kumar Jain v. Uno Minda Ltd. was cited to affirm that direct disbursement to the CD is not a sine qua non for financial debt.

The Tribunal analyzed the definition of "financial debt" under Section 5(8) and observed that the statute does not explicitly require funds to flow directly into the CD's account, provided there is a disbursement against the time value of money for the CD’s benefit or on its behalf.

The court then examined the "Covenant to Pay" in Clause 2 of the Supplemental IOMs, reading it in conjunction with the DTD.

It found that by signing the Supplemental IOMs, the CD became a "Security Provider" and "Obligor" who undertook an unconditional liability to discharge "Secured Obligations."

The Tribunal rejected the RP's argument that Clause 2.2 limited liability to default interest, noting that the later part of the clause mandated that the CD "not allow any Secured Obligations to fall in arrears," which created a secondary liability triggered by the principal borrower's default.

This specific undertaking transformed a simple mortgage into a contract of guarantee under Section 126 of the Contract Act.

The Tribunal 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 qualifies as a "Secured Financial Creditor" under Section 5(7) of the IBC.

The matter was remanded to the Adjudicating Authority for further proceedings in accordance with law.