Mortgage to Secure Group Company's Loan Isn't 'Financial Debt' Under IBC Sec 5(8) Without an Explicit Guarantee: NCLT - 2025-09-09

NCLT Rejects ARCIL's ₹1,279 Crore Claim as 'Financial Debt', Upholds Distinction Between Mortgage and Guarantee

Mumbai | September 9, 2025 – The National Company Law Tribunal (NCLT), Mumbai Bench, has delivered a significant ruling clarifying the scope of 'financial debt' under the Insolvency and Bankruptcy Code (IBC), 2016. In a detailed order, the bench comprising Shri. Prabhat Kumar (Member, Technical) and Shri. Sushil Mahadeorao Kochey (Member, Judicial) dismissed an application by Asset Reconstruction Company (India) Limited (ARCIL), holding that a debt secured by a third-party mortgage does not qualify as 'financial debt' unless the mortgage agreement explicitly contains a contract of guarantee.

The tribunal upheld the decision of the Interim Resolution Professional (IRP), Mr. Sanjay Jeswani, to reject ARCIL's claim of ₹1,279.92 crore as a financial creditor in the insolvency proceedings of XRBIA North Hinjewadi Developers Private Limited (the 'Corporate Debtor').

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Background of the Case

The Corporate Insolvency Resolution Process (CIRP) for XRBIA North Hinjewadi Developers was initiated on January 2, 2025. ARCIL, which had acquired loans originally granted by L&T Finance Limited to various Xrbia Group companies, filed a claim of nearly ₹1,280 crore.

This claim was based on several 'Indentures of Mortgage' (IoMs) where the Corporate Debtor had mortgaged its properties to secure loans disbursed not to itself, but to its sister concerns within the Xrbia Group. On January 30, 2025, the IRP, Mr. Jeswani, rejected ARCIL's claim as a 'financial creditor' and admitted it under the category of 'other secured creditor.' This decision stripped ARCIL of voting rights in the powerful Committee of Creditors (CoC), prompting it to approach the NCLT.

Key Arguments

ARCIL's Contention: The applicant, represented by Mr. Navroz Seervai, argued that the language in the mortgage deeds constituted an implicit guarantee. They contended that certain clauses, which obligated the 'Mortgagor' (the Corporate Debtor) to pay the 'Mortgage Debt,' effectively created a promise to discharge the liability of the borrowing group companies. ARCIL heavily relied on the Supreme Court's decision in China Development Bank vs. Doha Bank (2024), where a Deed of Hypothecation was interpreted to include a guarantee.

IRP's Response: Represented by Mr. Amir Arsiwala, the IRP countered that the Corporate Debtor was merely a third-party mortgagor. He argued that:

1. No funds were ever disbursed to the Corporate Debtor, a core requirement for 'financial debt' under Section 5(8) of the IBC, which requires disbursal against the "time value of money."

2. The mortgage deeds were limited to creating a security interest over specific assets and did not contain an unequivocal promise to pay the entire debt of the principal borrowers.

3. The case was squarely covered by the Supreme Court's precedent in Anuj Jain, IRP for Jaypee Infratech Limited vs Axis Bank , which held that a third-party mortgagor is not a financial creditor.

Legal Precedents and Tribunal's Analysis

The NCLT meticulously analyzed the definition of 'financial debt' under Section 5(8) of the IBC and the distinction between a mortgage and a guarantee. The tribunal noted that while a guarantee falls under Section 5(8)(i), a simple mortgage does not. A mortgage is a transfer of interest in a property to secure a debt, whereas a guarantee is a personal promise to discharge a third party's liability.

The bench distinguished the China Development Bank case, stating:

"It is pertinent to note that the Hon’ble Supreme Court held the appellant to be the financial creditor after concluding the terms of Deed of Hypothecation whereby Reliance Infratel Limited had undertaken to pay the short fall or deficiency, if any remains, after sale of the hypothecated assets to be a promise to pay whole of debt... which led the Hon’ble Supreme Court to construe the Deed of Hypothecation in that case as a contract of guarantee."

In contrast, the tribunal found no such "promise to pay the remainder of debt" in the XRBIA mortgage documents. It concluded that general clauses obligating the mortgagor to comply with loan terms could not be stretched to create a personal guarantee, especially when the recitals of the agreements clearly stated the intent was to create a "simple mortgage."

The NCLT concluded:

"If clause 3.2 of the IoM is read as bringing into existence a Guarantee obligation, it would extend beyond the scope of the loan agreement... and such expansive construction of IoM... shall also be contrary to the intention of the parties to create a simpliciter mortgage as expressed in the recital."

Final Decision and Implications

The NCLT dismissed ARCIL's application in its entirety, providing the following key rulings:

1. Claim Rejected as Financial Debt: The tribunal affirmed the IRP's decision, holding that ARCIL's claim is not a financial debt. It will remain classified as an 'other secured debt.'

2. No Removal of IRP: The bench rejected the plea to remove Mr. Sanjay Jeswani, finding no evidence of mala-fide conduct. It noted that the IRP had acted professionally by seeking a legal opinion before making his decision.

3. Other Reliefs Denied: All other interim reliefs sought by ARCIL, including a stay on the CIRP and the appointment of an external auditor, were denied.

This judgment reinforces the principle established in Anuj Jain , emphasizing that a creditor holding only third-party security interest, without a direct financial contract with the corporate debtor involving disbursal for time value of money or an explicit guarantee, cannot be part of the Committee of Creditors. This distinction is crucial for maintaining the integrity of the CIRP, as it ensures that only creditors with a direct stake in the corporate debtor's revival can influence its resolution.