Mortgage vs. Guarantee: Covenants in Loan Agreements are Crucial to Establish 'Financial Debt' under IBC S.5(8): NCLT Mumbai - 2025-09-21

NCLT Mumbai Clarifies When a Mortgage Becomes a Guarantee, Partially Admits ARCIL's ₹751 Crore Claim

In a nuanced ruling, the National Company Law Tribunal (NCLT) Mumbai Bench dissected several loan and mortgage agreements to distinguish between a simple third-party security and a contract of guarantee. The Tribunal held that specific 'covenant to pay' clauses can elevate a mortgagor's liability to that of a guarantor, thus classifying the debt as 'financial debt' under the Insolvency and Bankruptcy Code, 2016.

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Mumbai, India – The National Company Law Tribunal (NCLT), Mumbai Bench, comprising Shri Prabhat Kumar (Member, Technical) and Shri Sushil Mahadeorao Kochey (Member, Judicial), has delivered a significant order in the insolvency proceedings of Xrbia Warai Developers Private Limited. The Tribunal partially allowed an application by Asset Reconstruction Company (India) Limited (ARCIL), directing the Resolution Professional (RP), Mr. Vikas Gopichand Khiyani, to admit a substantial portion of ARCIL's previously rejected claim as 'financial debt'.

The ruling meticulously examines the fine line between a 'mortgage simpliciter' and a 'contract of guarantee', emphasizing that the specific covenants within financing documents are paramount in determining a creditor's status.

Background of the Dispute

The case stems from the Corporate Insolvency Resolution Process (CIRP) of Xrbia Warai Developers Private Limited. ARCIL, having acquired loans originally extended by L&T Finance to the Xrbia Group, filed a claim of approximately ₹995 crores. The Resolution Professional admitted only ₹192 crores, which was directly disbursed to the corporate debtor. He rejected the remaining claim of over ₹802 crores, reasoning that it pertained to loans disbursed to other Xrbia group companies for which the corporate debtor had only provided its property as third-party mortgage security.

Aggrieved by this rejection, ARCIL approached the NCLT, seeking the admission of its full claim as financial debt and the removal of the RP for his conduct.

Key Arguments Presented

ARCIL's Position: Senior Advocate Navroz Seervai, representing ARCIL, argued that the various loan and mortgage agreements contained clauses that created a 'joint and several liability' and a personal 'covenant to pay' on the part of the corporate debtor, even for loans disbursed to its group entities. They contended that these clauses effectively made the corporate debtor a guarantor. ARCIL heavily relied on the Supreme Court's decision in China Development Bank vs. Doha Bank to support its claim that a deed of hypothecation or mortgage can indeed constitute a guarantee.

Resolution Professional's Counter: Mr. Rohit Gupta, counsel for the RP, countered that the disputed debt lacked the essential element of 'disbursal for the time value of money' to the corporate debtor, a cornerstone of financial debt as established by the Supreme Court in Anuj Jain, IRP for Jaypee Infratech vs. Axis Bank . He argued that a third-party security interest alone does not make the security provider a financial creditor. The RP maintained that the agreements were for a simple mortgage and did not create a guarantee obligation.

NCLT's Analysis and Precedents

The Tribunal's core task was to determine if the financing documents created a contract of guarantee, which falls under Section 5(8)(i) of the IBC and does not require direct disbursal to the guarantor.

The Bench clarified a crucial point of law: the Supreme Court's ruling in China Development Bank does not overrule Anuj Jain . Instead, China Development Bank turned on its specific facts, where the hypothecation deed contained an explicit promise by the security provider to pay any shortfall after the sale of assets, thus creating a guarantee.

The NCLT established the following legal principles:

1. Disbursal remains a prerequisite for most forms of financial debt.

2. For a debt arising from a guarantee or indemnity, direct disbursal to the guarantor is not required.

3. Whether a mortgage agreement doubles as a guarantee depends entirely on the specific language and covenants within the document. A 'mortgage simpliciter' only secures debt with property, whereas a guarantee involves a personal promise to discharge the liability of a third person.

The Verdict: A Clause-by-Clause Examination

The Tribunal meticulously analyzed each loan facility:

• Loan Agreement of ₹370 Crores (29.06.2018): The Tribunal found a "Joint and Several Liability" clause (Clause 2.18) and a "covenant to personally pay" clause in the related mortgage indenture. This, the NCLT ruled, explicitly obligated the corporate debtor to repay the entire amount, effectively making it a guarantor for the portions disbursed to its group companies. This part of the claim was ordered to be admitted as financial debt.
• Supplemental Loan of ₹15 Crores (30.11.2022): As this agreement was supplemental to the ₹370 crore facility, the same reasoning was applied, and the debt was classified as financial debt.
• Loan of ₹250 Crores & Various ECLGS Facilities: For these loans, the Tribunal found that the agreements constituted a 'mortgage simpliciter'. The covenants did not contain a clear and unambiguous personal promise to pay the entire debt of the third-party borrower. The NCLT noted, "A promise to pay is a positive act and can not be inferred or deduced from the general clauses." Therefore, the rejection of these claims as financial debt by the RP was upheld. These amounts would be treated as claims from a secured creditor.

Final Decision and Implications

The NCLT partly allowed ARCIL's application, directing the RP to verify and admit the claims arising from the ₹370 crore and ₹15 crore facilities as 'financial debt'. The Tribunal rejected ARCIL's prayer to remove the RP, noting that he had acted based on legal advice and no mala-fide intent was demonstrated.

The judgment serves as a critical guide for financial creditors, resolution professionals, and legal practitioners. It underscores that the classification of debt in insolvency is not based on the title of a document ('Mortgage Deed') but on the substantive obligations created by its clauses. Creditors holding third-party securities must demonstrate a clear 'covenant to pay' or a promise to discharge liability to qualify as financial creditors and secure a seat on the Committee of Creditors.