⚖️ NCLAT Landmark Ruling — IBC Case Analysis 2026
Covenant to Pay in Mortgage Deed = Financial Debt — Debenture Trustee Qualifies as Financial Creditor Even Without Direct Disbursement to Corporate Debtor
NCLAT reversed the NCLT order and held that when a corporate debtor gives a "covenant to pay" in a mortgage deed securing a third party's debentures, such covenant creates an independent guarantee-like obligation — making the debenture trustee a financial creditor under Section 5(7) of the IBC.
📋 Quick Facts — Case at a Glance
Case Name (NCLAT): Vistra ITCL (India) Limited v. Radius Estate Projects Private Limited
In a ruling that will significantly impact how debenture trustees, security trustees and lenders structure third-party security in India's debt markets, the NCLAT has clarified a critical question: can a party who never received any money from a company still be classified as its "financial creditor" under the IBC? The answer, under the right contractual structure, is yes — and the Vistra ITCL v. Vithal Madhukar Dahake case shows exactly how.
🏢 Section 1 — Who Are the Parties?
Before diving into the legal battle, let us understand who is who in this case — because the relationships between the parties are central to the entire dispute.
| Party | Role | Key Action |
|---|---|---|
| Vistra ITCL (India) Limited | Debenture Trustee (SEBI licensed) | Claimed to be secured financial creditor of Corporate Debtor — challenged RP's rejection |
| Aaditri Constructions Pvt. Ltd. | Issuer Company / Principal Borrower | Issued secured optionally convertible debentures of Rs. 395 crores; actually received the money (Rs. 340 crores) |
| Radius Estate Projects Pvt. Ltd. | Corporate Debtor (in CIRP) | Mortgaged its properties as security for Aaditri's debentures; also gave "covenant to pay" in mortgage deed |
| Mr. Vithal Madhukar Dahake | Resolution Professional (RP) | Rejected Vistra's claim as financial creditor; asked it to file as "other secured creditor" |
| Debenture Holders | Investors in Aaditri's debentures | Subscribed Rs. 340 crores in debentures; Vistra acted as their trustee and held security on their behalf |
💡 Who is Vistra ITCL?
Vistra ITCL (India) Limited is India's largest independent corporate trustee, originally incorporated as IL&FS Trust Company Limited in 1995 before being rebranded as Vistra ITCL. It holds a Debenture Trustee licence from SEBI. It acts as a security trustee on behalf of investors/lenders — holding security (like a mortgage on property) in trust so that if the borrower defaults, Vistra can enforce the security for the benefit of the actual investors.
📖 Section 2 — Background: What Really Happened?
The Debenture Transaction
In 2017, Aaditri Constructions Private Limited wanted to raise money. It issued Secured Optionally Convertible Debentures (SOCDs) worth Rs. 395 crores on a private placement basis. Investors subscribed to these debentures — Rs. 340 crores was actually disbursed to Aaditri in tranches between October 2017 onwards.
Vistra ITCL was appointed as the Debenture Trustee vide a Debenture Trustee Agreement dated 05.09.2017. A Debenture Trust Deed (DTD) was executed on 03.08.2018 between Aaditri (Issuer), Vistra (Debenture Trustee), Radius & Deserve Builders LLP (Developer), Mr. Sanjay Chhabria (Promoter 1) and Mrs. Ritu Chhabria (Promoter 2).
The Third-Party Mortgage — The Root of the Dispute
Here is where things get legally interesting. Radius Estate Projects Pvt. Ltd. — which is NOT the debenture issuer and never received any of the Rs. 340 crores — agreed to mortgage its properties as security for Aaditri's debentures. The relevant documents were:
- Indenture of Mortgage (IOM) dated 03.08.2018 — Radius Estate mortgaged properties, creating first ranking exclusive charge in favour of Vistra (as Debenture Trustee)
- Supplemental IOM dated 29.03.2019 — Confirmed and extended the exclusive first ranking charge/mortgage
- Second Supplemental IOM dated 16.04.2019 — Further supplemental mortgage document
The mortgage deeds did two things: (1) they created security over Radius Estate's properties for Aaditri's debt, and (2) they contained a "covenant to pay" — a clause where Radius Estate as the mortgagor agreed/promised to repay the secured obligations under the debentures.
CIRP Begins — Vistra Files Its Claim
Radius Estate Projects was admitted into CIRP under the IBC. Mr. Vithal Madhukar Dahake was appointed as the Resolution Professional. On 02.12.2021, Vistra filed its claim against Radius Estate in Form C (the form used by financial creditors). Vistra's position was that it was a "secured financial creditor" because of the mortgage and the covenant to pay.
On 06.04.2023, the RP rejected Vistra's claim as a financial creditor and directed it to file its claim in Form F as an "other secured creditor." This was the trigger for the litigation.
🔑 Section 3 — The Core Concepts: Understanding the Legal Framework
What is "Financial Debt" Under Section 5(8) IBC?
📚 Section 5(8) IBC — Simple Explanation
Financial debt means a debt along with interest disbursed against the consideration for time value of money. It includes money borrowed, bonds, debentures, any liability under a financial lease, receivables sold or discounted, any amount raised under any other transaction (including any forward sale or purchase agreement) having the commercial effect of a borrowing, and any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit, or any other instrument issued by a bank or financial institution.
What Does "Time Value of Money" Mean? (Explained Simply)
Imagine you lend Rs. 100 to a friend today. You expect Rs. 110 back next year — the extra Rs. 10 is the price of time. The concept of "time value of money" recognises that money available today is worth more than the same amount in the future, because money can be invested to earn returns. When a financial creditor lends money, they charge interest — that interest is the "consideration for time value of money."
Under Section 5(8), a financial debt must have TWO essential elements:
💰
Element 1
DISBURSEMENT
Money must actually be paid out / advanced
⏱️
Element 2
TIME VALUE
Disbursement must be against consideration for time value of money (interest / return)
What is a "Third-Party Mortgage"?
A third-party mortgage happens when Company A creates a mortgage on its own property to secure Company B's loan. Company A (the mortgagor) never received any money — but its property is pledged as security for B's debt. In this case, Radius Estate (Company A) mortgaged its properties to secure Aaditri's (Company B's) debenture obligations. Radius Estate received nothing — but its properties were on the line.
⚠️ The Classic Third-Party Security Problem in IBC
Since no money was disbursed TO the Corporate Debtor (Radius Estate), the basic requirement for "financial debt" seems missing. Lenders holding third-party security are therefore typically excluded from being "financial creditors" — they end up as mere "secured creditors" with weaker rights (no CoC membership, liquidation-only rights). This is exactly what happened at the NCLT level.
⚖️ Section 4 — The Legal Issues Before the Courts
Two fundamental questions were raised before both the NCLT and NCLAT:
🏛️ Section 5 — Timeline: The Journey of This Case
05 September 2017
Debenture Trustee Agreement Executed
Vistra ITCL appointed as Debenture Trustee for Aaditri Constructions' debenture issuance
October 2017 Onwards
Rs. 340 Crores Disbursed to Aaditri
Debenture subscription amount disbursed in tranches to Aaditri Constructions (NOT to Radius Estate)
03 August 2018
Debenture Trust Deed + Indenture of Mortgage Executed
Radius Estate mortgages properties + gives covenant to pay in favour of Vistra as Debenture Trustee
29 March & 16 April 2019
Supplemental Indentures of Mortgage
First and Second Supplemental IOMs confirming exclusive first ranking charge on mortgaged properties
CIRP Initiated — Radius Estate Goes Insolvent
Mr. Vithal Dahake Appointed as Resolution Professional
CIRP commenced under CP(IB) No. 380 of 2021 (NCLT Mumbai, Court-V)
02 December 2021
Vistra Files Claim in Form C as Secured Financial Creditor
Vistra files its claim against Radius Estate with the RP
06 April 2023
RP Rejects Vistra's Claim as Financial Creditor
RP directs Vistra to file as "other secured creditor" in Form F instead of Form C
07 May 2024 — NCLT Mumbai (Court V)
NCLT Dismisses Vistra's Application (I.A. 2680 of 2023)
Bench: Ms. Reeta Kohli (J) + Mr. Sanjiv Dutt (T). NCLT holds: no disbursement to Corporate Debtor = no financial debt = Vistra is only secured creditor, not financial creditor. Covenant to pay cannot be a guarantee.
Feb 16–28, 2026 — NCLAT New Delhi (Principal Bench)
NCLAT REVERSES NCLT — Vistra IS a Financial Creditor ✅
Vistra ITCL (India) Limited v. Radius Estate Projects Private Limited — Company Appeal (AT)(Insolvency) No. 1110 of 2024. NCLAT holds: covenant to pay = independent guarantee-like obligation = financial debt even if disbursement was to third party. Decided alongside J.C. Flowers ARC v. Radius Estate (CA No. 1801 of 2024) through distinct legal ratios.
📜 Section 6 — NCLT's Ruling: Why It Said No to Vistra
The NCLT Mumbai Bench dismissed Vistra's application, relying on well-established IBC jurisprudence. Here is the reasoning:
The "Disbursement is Essential" Principle
The NCLT held that disbursement — the actual payment of money — is an indispensable requirement for a debt to qualify as "financial debt" under Section 5(8) of the IBC. Since not a single rupee was disbursed by any lender TO Radius Estate (the Corporate Debtor), there is no financial debt owed by Radius Estate to Vistra or the debenture holders.
The NCLT relied on the Supreme Court's ruling in Vistra ITCL India Ltd. vs. Dinkar Venkatasubramanian (2023 SCC Online SC 570) — where the same Vistra had lost a similar argument before the Supreme Court in the context of Amtek Auto Limited. The Supreme Court had held that mere creation of a pledge (security) without disbursement to the corporate debtor does not create a financial debt.
The "Covenant to Pay Cannot Be a Guarantee" Finding
Vistra's central argument was that the "covenant to pay" in the mortgage deed was effectively a guarantee — creating an independent obligation of Radius Estate to repay the debenture debt. The NCLT rejected this: "The covenant to pay cannot by any stretch of imagination be construed to be a guarantee provided by the Corporate Debtor in favour of the Applicant."
NCLT's Final Order
- Disbursement is indispensable — it was missing here
- Vistra cannot be a financial creditor under Section 5(7)
- Vistra cannot be a member of the Committee of Creditors (CoC)
- However, Vistra is entitled to all rights of a secured creditor under Sections 52 and 53 of IBC (liquidation waterfall rights)
- I.A. 2680 of 2023 dismissed
🏆 Section 7 — NCLAT's Ruling: Why It Reversed the NCLT
Vistra appealed the NCLT's decision to the NCLAT. In a significant departure from the NCLT's view, the NCLAT reversed the order and recognised Vistra as a financial creditor. The reasoning is built on a careful reading of the "covenant to pay" clause.
Key Principle 1 — Covenant to Pay Creates Guarantee-Like Obligation
The NCLAT held that a "covenant to pay" in a mortgage deed cannot be treated merely as a security enforcement mechanism. When you promise to pay someone's debt — not just allow your property to be sold — you are creating a personal obligation on yourself. This is more than just giving security. It is closer to giving a guarantee.
The NCLAT held that when the covenant to pay is read together with the underlying financial documents (the Debenture Trust Deed, the facility arrangements, the end-use of funds), it establishes the Corporate Debtor (Radius Estate) as a guarantor or co-obligor in the overall borrowing transaction.
Key Principle 2 — Section 126 Indian Contract Act Angle
The NCLAT found that such a covenant amounts to a contract of guarantee under Section 126 of the Indian Contract Act, 1872. Under Section 126, a contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of their default. Radius Estate's covenant to pay the debenture obligations when Aaditri defaults fits this definition precisely.
📚 Section 126 — Indian Contract Act, 1872 (Simplified)
A contract of guarantee = a promise by Person C to perform the obligation of Person B, if Person B fails to do so. C is the guarantor (surety), B is the principal debtor, and A is the creditor. In this case: Radius Estate (C) promised to pay Aaditri's (B) debenture obligations to Vistra/debenture holders (A). This makes Radius Estate a guarantor — which means its obligation IS a financial debt under Section 5(8)(i) of the IBC.
Key Principle 3 — Independent Personal Liability Created
The NCLAT noted that the covenant to pay creates an independent personal liability of the Corporate Debtor — one that can be enforced by the mortgagee (Vistra) as a standalone contractual remedy, separate from enforcing the mortgage security. This is the critical distinction: it is not merely about selling the mortgaged property on default — it is about Radius Estate's personal promise to repay.
Key Principle 4 — Financial Debt Can Arise Even With Disbursement to Third Party
This is the most impactful part of the NCLAT ruling. The NCLAT held that once a guarantee relationship is established through the covenant to pay, a financial debt arises for the guarantor (Radius Estate) even though the original disbursement was made to a third party (Aaditri). The disbursement element is satisfied through the overall transaction structure — money was disbursed (to Aaditri) against the time value of money (interest on debentures), and Radius Estate contractually committed to pay this debt.
🔑 The NCLAT's Core Holding in Simple Words
"When a corporate debtor signs a covenant to pay in a mortgage deed, it is not just pledging its property — it is making a personal promise to repay. That promise is a guarantee. A guarantee creates a financial debt. Therefore, the debenture trustee holding that covenant is a financial creditor."
📊 Section 8 — NCLT vs NCLAT: Complete Comparison
| Parameter | NCLT Mumbai (May 2024) | NCLAT New Delhi (2026) |
|---|---|---|
| Vistra's status | Only "other secured creditor" — NOT financial creditor | Financial Creditor ✅ |
| Disbursement requirement | Must be to the corporate debtor directly — strictly applied | Satisfied through overall transaction where corporate debtor is guarantor/co-obligor |
| Covenant to pay | Cannot be construed as guarantee — irrelevant for financial debt | Creates independent personal liability = guarantee under Section 126 Contract Act = financial debt |
| CoC membership | Denied | Entitled |
| Applicable precedent | Strictly followed Vistra v. Dinkar (SC 2023) — no direct disbursement = no financial creditor | Distinguished Dinkar on facts — present case has covenant to pay creating guarantee obligation |
| Rights available | Only Sections 52 and 53 IBC — liquidation waterfall rights | Full financial creditor rights including CoC membership, voting on resolution plan |
🔄 Section 9 — How Does This Differ From Earlier Judgments?
| Case | Court | What Was Held | Key Difference from Present Case |
|---|---|---|---|
| Vistra ITCL v. Dinkar Venkatasubramanian (2023 SC 570) | Supreme Court | Mere pledge over shares (security) without disbursement to corporate debtor does NOT make the security holder a financial creditor. SC modified NCLAT order — Vistra was recognised as a secured creditor under Sections 52 & 53 IBC, but NOT as financial creditor | That case had only pledge — NO covenant to pay. Present case HAS covenant to pay creating independent liability |
| Anuj Jain, IRP for Jaypee Infratech (2020 SC) | Supreme Court | Third party who creates security without receiving disbursement is not a financial creditor — no financial debt without disbursement to corporate debtor | No covenant to pay / guarantee clause. Security was given but no personal payment obligation |
| J.C. Flowers ARC v. Radius Estate Projects (NCLAT 2026) | NCLAT | Also affirmed mortgagee as financial creditor — but through different legal ratio (different factual basis) | Companion case decided the same way but through distinct reasoning |
| Rajeev R. Jain vs. Aasan Corporate Solutions (NCLAT 2022) | NCLAT | Mortgagee can file Section 7 application — mortgagee has right to sue for mortgage money | Established that mortgagee has locus — cited by Vistra in its favour |
🧑⚖️ Section 10 — Author's Analysis
✍️ Editorial Analysis — CorpLawUpdates.in
The NCLAT ruling in Vistra ITCL v. Vithal Dahake is a thoughtful and commercially pragmatic evolution of IBC jurisprudence. It is not a departure from the Supreme Court's earlier rulings — it is a refinement. The key innovation lies in recognising that the presence or absence of a "covenant to pay" fundamentally changes the legal character of the third-party mortgagor's obligation.
The practical importance cannot be understated. In India's debt markets, it is extremely common for a project company or a promoter's holding company to mortgage its properties to secure the borrowings of a related entity — while including a "covenant to pay" to enhance the lender's rights. The NCLAT has now given these creditors a path to CoC membership — and thereby, meaningful participation in the resolution process.
At the same time, the ruling creates an important cautionary note: not every third-party mortgage will automatically qualify the mortgagee as a financial creditor. The presence of a specific, enforceable covenant to pay — one that can be read as creating a guarantee-like independent obligation — is the decisive factor. A bare mortgage without such a covenant will still leave the mortgagee as only a "secured creditor" under Sections 52/53.
For drafting professionals and transaction lawyers: this ruling is a drafting lesson. Ensure that third-party mortgage deeds include clear, enforceable covenants to pay — not just security creation clauses. That one additional clause can be the difference between being a financial creditor with CoC rights, or an outside-the-CoC secured creditor with limited recovery prospects in a CIRP.
💼 Section 11 — Practical Impact: Who Should Care About This Ruling?
| Stakeholder | What Changes for Them | Action Recommended |
|---|---|---|
| Debenture Trustees (like Vistra) | Path to financial creditor status — CoC membership — if mortgage deed has covenant to pay | Review all existing mortgage deeds — identify covenant to pay clauses — file appropriate claims |
| Transaction / Debt Market Lawyers | Covenant to pay now has clear legal value in insolvency — drafting becomes critical | Always include specific, standalone covenant to pay in third-party mortgage deeds; ensure it reads as an independent personal obligation |
| Resolution Professionals | Cannot summarily reject claims of debenture trustees as "other secured creditors" — must examine covenant to pay carefully | Read all mortgage deeds carefully; check for covenant to pay; seek legal opinion before rejecting financial creditor claims |
| Lenders / NBFCs / Banks | Security structures with covenant to pay now have stronger insolvency protection — CoC membership | Ensure third-party security documents include covenant to pay for enhanced insolvency rights |
| Real Estate Companies / Promoters | Giving covenant to pay in mortgage deed now creates direct personal financial liability in insolvency — not just property risk | Carefully negotiate scope of covenant to pay before signing; understand that it creates independent personal liability |
| RP / CoC Members | CoC composition may change — more creditors may qualify as financial creditors in real estate CIRP cases | Review CoC membership claims in ongoing CIRP cases where third-party mortgages exist |
❓ Section 12 — Frequently Asked Questions
📝 Bottom Line — What This Case Teaches
✅ Covenant to pay is a game-changer: A mortgage deed with a covenant to pay creates an independent personal liability on the corporate debtor — qualifying the debenture trustee as a financial creditor under Section 5(7) and 5(8).
✅ Not every third-party mortgage qualifies: A bare mortgage without covenant to pay still leaves the mortgagee as a mere secured creditor. The covenant to pay is the essential element that bridges the gap.
✅ Drafting matters enormously: Transaction lawyers must include clear covenants to pay in all third-party mortgage deeds where financial creditor status in insolvency is commercially important.
✅ RPs must be careful: Cannot summarily reject claims of trustees holding mortgage deeds — the documents must be read carefully to check for covenants to pay before classifying the creditor.
✅ Watch the Supreme Court: This ruling may travel to the Supreme Court — given the tension with the 2023 Dinkar judgment. The final word on third-party mortgage + covenant to pay in insolvency is yet to come.
Sources: Vistra ITCL (India) Limited v. Mr. Vithal Madhukar Dahake, RP of Radius Estate Projects Pvt. Ltd. — NCLT Mumbai Bench, I.A. No. 2680 of 2023, Judgment dated 07 May 2024 (Bench: Ms. Reeta Kohli, Mr. Sanjiv Dutt) | NCLAT New Delhi — Company Appeal (AT)(Insolvency) No. 1110 of 2024 | Vistra ITCL (India) Ltd. & Ors. v. Dinkar Venkatasubramanian & Anr., 2023 SCC Online SC 570 | Section 5(7), 5(8), 60(5) of Insolvency and Bankruptcy Code, 2016 | Section 126, Indian Contract Act, 1872 | NCLAT Fortnightly: Important Orders on IBC (Feb 16-28, 2026) — Bar & Bench | CaseMine, IBC Laws, Legitquest.
⚠️ Disclaimer: This article is for educational and informational purposes only. It does not constitute legal advice. The facts and legal analysis presented are based on publicly available information and secondary sources. Readers should consult qualified legal professionals for advice on specific situations. CorpLawUpdates.in does not take any responsibility for any action taken based on the information provided herein.
