Direct disbursement of funds is not a prerequisite for debt to qualify as a "Financial Debt."

The Appellant, an Asset Reconstruction Company, is the assignee of loans originally extended by YES Bank to Sumer Radius Realty Pvt. Ltd. ("Principal Borrower").

To secure a ₹300 Crore facility, the Corporate Debtor (REPPL) executed a Deed of Mortgage dated 12.05.2016 over its 50% undivided share in the "Avenue 54" project.

Upon the Principal Borrower’s default, YES Bank initiated SARFAESI proceedings and subsequently filed a claim in the Corporate Debtor’s CIRP.

The Respondent (RP) admitted a portion of the claim based on a Corporate Guarantee but classified the ₹121.83 Crore claim arising from the Mortgage Deed as "Other Secured Creditor" rather than "Secured Financial Creditor," citing a lack of direct disbursement to the Corporate Debtor.

The Adjudicating Authority upheld the RP's classification.

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

Whether the "covenant to pay" and the nature of an "English Mortgage" in the Mortgage Deed qualify the debt as a financial debt, rendering the Appellant a "Secured Financial Creditor".

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

It relied on the Supreme Court’s ruling in China Development Bank v. Doha Bank Q.P.S.C., which established that a "covenant to pay" in a security document, coupled with a promise to discharge liability upon default, constitutes a guarantee under Section 126 of the Indian Contract Act, 1872.

Furthermore, the court applied Section 58(e) of the Transfer of Property Act, 1882 regarding "English Mortgages," which impose personal liability on the mortgagor.

Precedents such as Laxmi Pat Surana v. Union Bank of India were cited to affirm that a guarantor's liability is co-extensive with the principal borrower under Section 128 of the Contract Act.

The Tribunal reasoned that Section 5(8) of the IBC does not expressly require funds to be deposited directly into the Corporate Debtor’s account; rather, disbursement for the benefit of the Corporate Debtor satisfies the "commercial effect of borrowing".

It distinguished the present case from Anuj Jain v. Axis Bank, noting that the subject Mortgage Deed contained an express "Covenant to Pay" (Clause 3) and a "Liability for Deficiency" (Clause 25), which created an independent contractual obligation to repay the debt.

The Tribunal found that the Mortgage Deed was explicitly characterized as an "English Mortgage," where the Mortgagor binds himself personally to repay the mortgage money.

Consequently, the arrangement moved beyond mere third-party security and assumed the character of a financial debt under Sections 5(8)(f), (h), and (i) of the Code.

It concluded that the "Covenant to Pay" in the English Mortgage constituted a contract of guarantee, qualifying the Appellant as a "Secured Financial Creditor".

The Impugned Order was set aside, and the matter was remanded to the Adjudicating Authority to admit the Appellant’s claim as a secured financial debt.

All parties were directed to appear before the NCLT on 19.03.2026.