TaxTMI 
TaxTMI 
2026 (3) TMI 94
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Mr. Vithal M. Dahake, Resolution Professional of the Corporate Debtor i.e. Radius Estate Projects Pvt. Ltd., is the Respondent herein. 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 stated that it is a company incorporated under the Companies Act, 2013, and is registered with the Reserve Bank of India as an Asset Reconstruction Company under Section 3 of SARFAESI Act. The Appellant further submitted that it is the assignee of the financial assets pertaining to the Corporate Debtor, which were originally extended by YES Bank Ltd. 4. The Appellant submitted that YES Bank sanctioned a Term Loan of Rs. 350 Crore to Sumer Radius Realty Pvt. Ltd. (Principal Borrower/SRRPL) vide Facility Letter no. YBL/MUM/FL/1487/2015-16 dated 31.03.2016 in two tranches: Rs. 111 Crore (Term Loan-I) for construction, development, and tenan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing only Term Loan- I as the outstanding debt. 11. The Appellant submitted that SBICAP Trustee Company Limited filed an application under Section 7 of the Code, against the Corporate Debtor before the Adjudicating Authority, and vide order dated 06.09.2021, the CIRP was commenced against the Corporate Debtor, with the Respondent herein appointed as the Interim Resolution Professional (IRP). 12. The Appellant stated that thereafter, the Respondent made a public announcement inviting claims, pursuant to which Yes Bank submitted its claim as a financial creditor on 10.11.2021 for a total sum of Rs. 184,35,46,857/-, out of which Rs. 62,52,24,298/- pertained to the Corporate Guarantee provided by the Corporate Debtor for the loan extended by Yes Bank to Radius Estate and Developers Pvt. Ltd., while the remainder related to mortgage obligations under the Deed of Mortgage, which included a covenant to pay. 13. The Appellant contended that the Respondent, vide email dated 01.12.2021, rejected Yes Bank's claim to the extent it pertained to Term Loan-I of Rs. 111 Crores advanced to the Principal Borrower, and thereby refused to admit Yes Bank as a secured financial creditor in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erm Loan-I of Rs. 111 Crore, sanctioned vide letter dated 31.03.2016, was expressly for "construction and development expenses, including balancing tenant settlement costs" of the Corporate Debtor's "Avenue 54" project, with security including mortgage over the Corporate Debtor's development rights in the said project. 20. The Appellant contended that under the Development Agreements, the Corporate Debtor granted development rights over its 50% undivided share in Avenue 54 to the Principal Borrower in consideration of 1,50,000 sq. ft. of saleable area, thereby directly benefiting from project completion, as also noted by the Respondent in the CoC meeting dated 23.01.2023. 21. The Appellant submitted that the Corporate Debtor mortgaged its share in the project and expressly covenanted to pay the Mortgage Debt upon the Principal Borrower's default, and that this obligation must be read in conjunction with the financing documents executed by the Principal Borrower, the Appellant (creditor), and the Corporate Debtor (surety/mortgagor). 22. The Appellant submitted that the Mortgage Deed constitutes an English Mortgage under Section 58 of the Transfer of Property Act, 1882, impo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Corporate Debtor is not required for the debt to qualify as financial debt. 28. The Appellant contended that the Term Loan-I was sanctioned for construction, development, and tenant settlement costs of the Corporate Debtor's "Avenue 54" project, with security including mortgage over development rights granted by the Corporate Debtor, and that the Corporate Debtor directly benefited from the arrangement by receiving 1,50,000 sq. ft. of saleable area entitlement, thereby giving the transaction the commercial effect of borrowing under Section 5(8)(f) of the Code. 29. The Appellant submitted that the Hon'ble Supreme Court in Pioneer Urban Land and Infrastructure Limited v. Union of India [(2019) 8 SCC 416] held that the definition of "debt" under Section 5(8) is expansive and not exhaustive. The Appellant further stated that this Appellate Tribunal in BVS Lakshmi v. Geometrix Laser Solutions Private Limited [2017 SCC OnLine NCLAT 531] and Rajeev Kumar Jain v. Uno Minda Limited [2024 SCC OnLine NCLAT 28] has held that disbursement directly to the corporate debtor is not necessary under Section 5(8) of the Code, therefore Ld. Adjudicating Authority erred in restricting its anal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gdon Catholic Colony (Willingdon East), Village Bandra, Mumbai Suburban District, admeasuring 21,774.10 sq. mtrs. The Respondent further submitted that, for the development of the said land under the project "Avenue 54", Sumer Radius Realty Private Limited (SRRPL) was incorporated with directors from the suspended Board of the Corporate Debtor and from SBPL. 39. The Respondent stated that, as per a Development Agreement dated 29 June 2017 entered into by the Corporate Debtor and SBPL in favor of SRRPL, development rights over the complete land parcel were transferred to SRRPL. In return, SRRPL was required to build and hand over residential units equivalent to 1,50,000 sq. ft. of FSI to each of the Corporate Debtor and SBPL, along with a proportional share of car parking spaces. The Respondent submitted that SRRPL obtained a term loan of Rs. 350 crores from the Appellant, and for this purpose, the Corporate Debtor executed a mortgage deed dated 12 May 2016 over the land as collateral for the said facility. 40. The Respondent submitted that, following the commencement of the Corporate Insolvency Resolution Process (CIRP) for the Corporate Debtor, the Appellant lodged its claim....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Axis Bank Ltd. (2020) 8 SCC 401, the provisions of Sections 5(7) and 5(8) of the Code apply to transactions involving the Corporate Debtor directly; only a party to whom the Corporate Debtor owes a financial debt can qualify as a Financial Creditor. The Respondent submitted that no direct disbursement was made by the Appellant the Corporate Debtor. A third party, to whom no financial debt is owed by the Corporate Debtor, cannot be deemed its Financial Creditor under Part II of the Code. The Respondent further submitted that, consistent with the Supreme Court's views in Swiss Ribbons Pvt. Ltd. v. Union of India and Anuj Jain (supra), a Financial Creditor is characterized by direct participation in the Corporate Debtor's operations from evaluating viability and structuring loans to supporting reorganization amid financial difficulties thereby assuming a protective role in its revival for the advantage of all stakeholders. 46. The Respondent submitted that the aforementioned rulings clearly establish that when a Corporate Debtor grants a mortgage to secure the obligations of a third party, without any direct disbursement to itself, the mortgage holder while acquiring the status of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....peal. 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"? III. Whether the "covenant to pay" in the Mortgage Deed create an enforceability guarantee or merely secures the mortgage? 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. 53. We note that the Appellant had preferred Interlocutory Application No. 1157 of 2022 before the Adjudicating Authority seeking a direction to the Respondent to admit a claim of Rs, 121,83,22,459/- and to treat the Appellant in respect of the said claim also as a Secured Financial Creditor. 54. We note that Yes Bank (Original Lender) sanctioned certain loan facilities of Rs 300 crores (Term Loan1 of 111 cr. and Term Loan 2 of 239 cr. vide Facility Letter No. YBL/MUM/FL/1487/2015-16 dated 31.03.2016, Loan Agreement d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by Yes Bank to SRRPL and not to the Corporate Debtor. Corporate Debtor is not even a shareholder in SRRPL, to whom the money has been disbursed by the Yes Bank and as such the Corporate Debtor is not a beneficiary to the amount claimed by Yes Bank. In addition to the same, the said transaction of mortgage does not fall within the meaning of financial debt as per Section 5(8) of the Code, and therefore the said debt cannot be treated as a financial debt and the Appellant cannot be treated as a Financial Creditor of the Corporate Debtor to the extent of the said claim. 58. The main ground of the Respondent is that when the Corporate Debtor creates mortgage to secure payment obligation of a third party, without disbursement of any debt to itself (the Corporate Debtor), the mortgagee, even if becoming a secured creditor because of creation of mortgage, could at the most be described as 'indirect (other) secured creditor' and cannot even be treated as a 'direct secured creditor' so as to become a 'financial creditor' because, the mortgage transaction is not envisaged to be a 'financial debt' in Section 5(8) with its sub- clauses (a) to (i) of the Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....harge and transfer unto the Mortgagee for the benefit of the Secured Parties in terms of the provisions contained in Schedule I all right(s), title(s) and interest(s) share of the Mortgagor asserts more particularly described in paragraph 10(A) of Schedule I And in Schedule III (collectively the "Mortgaged Properties"). Clause 12 (iv)- Additional Covenants The Mortgagor shall from time to time and at all times during the continuance of these presents and the Security Interest hereby created and whether the Mortgagee acting on behalf of the Secured Parties shall have taken possession of the Mortgaged Properties under the power hereinbefore reserved to it or not, keep the Mortgaged Properties hereby granted, conveyed, assigned and assured or secured or charged or expressed so to be in a good and substantial state of repair and shall duly pay and discharge all dues and charges including without limitation, all the government revenue, rates, rents, taxes, assessments, dues and duties and all charges of a public nature and all other dues, charges and outgoings of governmental or non-governmental or any other nature whatsoever, including those (if any) in arrears payabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....led the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written. ..... 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." (Emphasis supplied) 65. We note that the hon'ble Supreme Court in Cosmos Co. Operative Bank Ltd. v. Central Bank of India and Others (2025 SCC OnLine SC 352), held that: "51. Deposit of title deeds is one of the many forms of mortgages whereunder there is a transfer of interest in specific immovable property for the purpose of securing payment of money advanced or to be advanced by way of loan. The three requisites for a valid mortgage are, (i) debt; (ii) deposit of title deed; and (iii) an intention that the deed shall operate as security for the debt. In other words, when the debtor deposits with the cre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, and further provides that the Corporate Debtor shall remain personally liable for any deficiency even after enforcement. Similarly, we observe that Deed of Mortgage dated 12.05.2016 in clause D expressly stipulates that: "The Mortgagor and the Mortgagee have agreed that the mortgage and charge on the Mortgaged Properties shall be by way of a legal mortgage in English form by way of a registered mortgage deed being these presents." Thus, the Deed of Mortgage dated 12.05.2016 qualifies as an English Mortgage under Section 58(e) of the Transfer of Property Act, 1872. Consequently, under of the Deed of Mortgage dated 12.05.2016, the Appellant is entitled to recover the mortgage money directly from the REPPL in the event of default by the Principal Borrower. It is worth noting that Clause 8 Deed of Mortgage dated 12.05.2016 further amplify Mortgagee's authority to reassign, re-convey, or re-transfer upon repayment, affirming that all essential attributes of an English Mortgage are satisfied. We do not agree to the pleading of the Respondent No on this issue noted earlier. 68. We also take into consideration that this Appellate Tribunal in, Rajeev R. Jain vs Aasan Corporate Solutio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the REPPL, thereby having the commercial effect of borrowing under Section 5(8)(f) of the Code. 72. We observe that the reliance placed by the Adjudicating Authority and Respondent on Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, may not be correct, as the said judgment pertained to a mere mortgage without a covenant to pay. In contrast, the present case involves an express covenant to pay, creating a direct liability on the Corporate Debtor, which will be covered by the judgment delivered by the Hon'ble Supreme Court in case of China Development Bank (supra), in paragraph 31 of the judgment. 73. We also observe that, similarly, reliance on New Okhla Industrial Development Authority v. Anand Sonbhadra is misplaced, as the instant case involves an explicit contractual guarantee and English Mortgage, both satisfying the statutory requirements for financial debt. 74. At this stage we will look into Section 58 of Transfer of Property Act 1872- "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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 [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.] (Emphasis supplied) 75. 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate Debtor. The expression "sine qua non" means an indispensable or mandatory condition. The question 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. As also noted by us, 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. 80. 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 mon....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... It is the argument of the Respondent that Clause 3 of the Mortgage Deed merely records the Corporate Debtor's undertaking to repay the mortgage debt in accordance with relevant financing documents including this deed. It does not contain any language addressing "failure to pay," "event of default," or any contingency triggered by non-payment. 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 3 contains no such default-triggered language. 84. The Respondent 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 enf....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... an explicit promise to discharge liabilities i.e shortfalls. 87. 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 will typically 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 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 in Anuj Jain v. Axis Bank (2021) and Ph....