Direct Disbursement To Corporate Debtor Not Mandatory To Qualify As Financial Debt Under IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi on Tuesday observed that direct disbursement of funds to a corporate debtor is not mandatory for a debt to qualify as a “financial debt” under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.

A bench of Judicial Member Justice Mohammad Faiz Alam Khan and Technical Member Naresh Salecha observed,

“We carefully observe that the Section does not use the word “to the Corporate Debtor” after word “disbursed”. From the statutory language, the essential ingredients of financial debt are Existence of a debt, Disbursement of money, Consideration for time value of money and Commercial effect of borrowing.”

The ruling came in an appeal filed by Vistra ITCL (India) Ltd. against an order of the NCLT, Mumbai Bench, which had upheld the resolution professional's decision to classify Vistra as an “other secured creditor” instead of a secured financial creditor in the corporate insolvency resolution process of Radius Estate Projects Pvt. Ltd.

Vistra, acting as debenture trustee for debenture holders who had subscribed to optionally convertible debentures worth Rs.395 crore issued by Aaditri Constructions Pvt. Ltd., approached the Tribunal after its claim was downgraded in the CIRP.

To secure the debenture obligations, supplemental indentures of mortgage were executed in 2019, under which the corporate debtor agreed to discharge all “secured obligations” arising under the Debenture Trust Deed.

Following default, Vistra filed a claim of Rs. 874 crore in the CIRP of the corporate debtor, asserting that the mortgage deeds contained an express and unconditional “covenant to pay” amounting to a guarantee. The resolution professional refused to treat the claim as that of a secured financial creditor, saying that no money had been directly disbursed to the corporate debtor.

Before the Appellate Tribunal, the resolution professional and the other respondents argued that the corporate debtor had neither borrowed the funds nor received the debenture proceeds. According to them, merely offering its assets as security, without receiving any part of the loan, would not qualify as a financial debt under Section 5(8) of the Code.

The NCLAT, however, examined whether such direct disbursement was essential and held that the law does not expressly require the funds to be transferred into the corporate debtor's account for the debt to fall within the definition of financial debt. What is required, the Bench said, is disbursement against consideration for the time value of money, not necessarily direct receipt by the corporate debtor.

Relying on its earlier decision in Rajeev Kumar Jain v. Uno Minda Ltd., the tribunal held that direct disbursement to the corporate debtor is not an indispensable condition.

On the second issue, the tribunal examined whether the “covenant to pay” in the mortgage deeds amounted to a guarantee. It held that the corporate debtor's promise to repay the secured obligations was, in substance, a contract of guarantee under Section 126 of the Indian Contract Act.

The tribunal further noted that this undertaking was given as part of the debenture transaction and created an enforceable liability, not just a security over property.

The Appellate Tribunal therefore found that Vistra's claim was not based merely on a mortgage securing someone else's debt, but on a guarantee that formed part of the overall borrowing arrangement. It accordingly set aside the NCLT's order and remanded the matter for fresh consideration in line with its findings