A company that never borrowed money was forced to pay lenders. Here's why.

RITL never took a loan from these banks. But it signed a deed that said: if the collateral isn't enough, we'll pay the rest. The banks came knocking.

When RITL entered insolvency proceedings in 2018, a group of foreign banks filed claims worth hundreds of crores. They weren't direct lenders to RITL. They had lent money to RITL's sister companies — RCom and RTL. But RITL had signed a document called a Deed of Hypothecation, pledging its assets as security for those loans. Buried inside that deed was a single clause that changed everything.

The question before the Supreme Court was deceptively simple: could a company that never borrowed a rupee from these banks still be forced to treat them as its financial creditors?

When the shortfall clause became a promise

Several foreign banks had advanced secured loans to two companies in the Reliance Communications (RCom) group — RCom and RTL. RITL, a sister company, was not a borrower under any of those facility agreements. But RITL executed Deeds of Hypothecation, pledging its own assets as collateral for the loans taken by RCom and RTL. The deed itself was a thick, signed document, its pages bearing the weight of legal obligation — but it was a single clause, clause 5(iii), that would prove decisive.

That clause read like a quiet afterthought. It said: if the sale of the hypothecated assets did not cover the full amount owed to the banks, RITL would pay the shortfall. Not the borrower. RITL. The language was direct, almost clinical — a promise to cover whatever remained after the assets were sold.

When RITL went into the Corporate Insolvency Resolution Process (CIRP — the formal insolvency process under the Insolvency and Bankruptcy Code), the banks submitted claims to the Resolution Professional (the person appointed to manage the insolvent company). They claimed to be financial creditors of RITL, based on that shortfall clause. The Resolution Professional admitted their claims. The Committee of Creditors (CoC — the group of creditors that decides the company's fate during insolvency) approved a resolution plan unanimously at a meeting on 2 March 2020. The NCLT approved that plan on 3 December 2020 — but it did so without deciding Doha Bank's application challenging the banks' status. The NCLAT then remanded the matter back to the NCLT on 19 January 2021, directing it to decide Doha Bank's application. When the NCLT upheld the banks' status as financial creditors, Doha Bank appealed again.

Doha Bank — a direct lender to RITL — had objected from the start. It argued that these other banks were not financial creditors of RITL at all. They had lent money to RCom and RTL, not to RITL. A deed of hypothecation, Doha Bank said, is not a guarantee. The shortfall clause was just a promise to pay from the sale of assets, not a personal promise to pay from RITL's own pocket.

The NCLAT's view: no guarantee, no financial debt

The National Company Law Appellate Tribunal (NCLAT — the appellate body for insolvency cases) agreed with Doha Bank. In September 2022, the NCLAT bench sat in a silent courtroom in New Delhi as it set aside the earlier orders that had recognised the banks as financial creditors. The NCLAT held that a Deed of Hypothecation is a security document, not a guarantee. It creates a charge over assets, but it does not create a personal obligation on the company to pay the debt of another.

The banks appealed to the Supreme Court.

What the Supreme Court examined

The bench of Justice Abhay S. Oka had to decide one thing: did clause 5(iii) of the Deed of Hypothecation amount to a guarantee under Section 126 of the Indian Contract Act, 1872?

Section 126 defines a contract of guarantee as a promise to perform the obligation of another person in case of their default. Three parties are needed: the creditor, the principal debtor (the one who borrows), and the surety (the one who promises to pay if the borrower defaults).

The banks argued that clause 5(iii) was exactly that promise. RITL had said: if the borrower doesn't pay, and if the sale of assets doesn't cover the debt, I will pay the rest. That, they said, is a guarantee.

Doha Bank and RITL's other creditors argued the opposite. A deed of hypothecation, they said, is a security document. It creates a right to sell assets. It does not create a personal liability. The shortfall clause was merely a mechanism to ensure the lender could recover from the pledged assets — not a promise by RITL to pay from its general funds.

The court also had to consider Section 5(8)(i) of the Insolvency and Bankruptcy Code (IBC — the law governing insolvency in India). That section says that "financial debt" includes any amount raised under a guarantee. If clause 5(iii) was a guarantee, then the banks' claims qualified as financial debt, and the banks were financial creditors of RITL.

The Supreme Court, in its judgment dated 20 December 2024, held that clause 5(iii) "constituted a guarantee under Section 126 of the Contract Act, qualifying as financial debt under Section 5(8)(i) IBC, entitling the appellants to Financial Creditor status." The court's printed order carried that reasoning, a single paragraph that resolved a years-long dispute.

Why the title of the document didn't matter

The Supreme Court held that the name of a document is not decisive. You cannot call something a "Deed of Hypothecation" and expect the court to ignore that it also contains a guarantee. The court must look at all the clauses, all the obligations, and decide what legal relationships the document actually creates.

Clause 5(iii), the court found, was not just about selling assets. It was a promise by RITL to pay a shortfall. That promise was triggered by the borrower's default. It was a promise to discharge the liability of a third person — RCom and RTL — in case of their default. That is the very definition of a guarantee under Section 126 of the Contract Act.

The court also noted that the fact that the lenders were not directly named as parties to the deed did not matter. The deeds were executed through a Security Trustee acting under a Master Security Trust Agreement (MSTA — an agreement where one entity holds security on behalf of multiple lenders). The tripartite structure required for a guarantee — creditor, principal debtor, surety — could still be identified.

The court drew on several precedents to support its reasoning. In Kotak Mahindra Bank Ltd. v. A. Balakrishnan, the court had held that a guarantee creates a financial debt even if the guarantor never received the loan amount. In Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., the court had clarified that the substance of a transaction, not its form, determines whether a debt exists. In Maitreya Doshi v. Anand Rathi Global Finance Ltd., the court had examined how guarantees operate in the context of the IBC. And in Anuj Jain v. Axis Bank Ltd., the court had distinguished between security interests and guarantees — a distinction the court now refined. The court also considered Committee of Creditors of Essar Steel v. Satish Kumar Gupta, which had established that financial creditors control the insolvency process, and Phoenix ARC Pvt. Ltd. v. Ketulbhai Ramubhai Patel, which had examined the scope of financial debt. The judgment in Union of India v. D.N. Revri & Co. was cited for the proposition that a contract of guarantee is not a contingent contract under Section 32 of the Contract Act — a distinction the court expressly drew, holding that a guarantee is a specific type of contract with its own rules, not a contingent contract that depends on a future uncertain event.

The guarantee made them financial creditors

Once the court held that clause 5(iii) was a guarantee, the rest followed. Under Section 5(8)(i) of the IBC, any amount raised under a guarantee is financial debt. The banks, as the lenders who were owed money under that guarantee, were financial creditors of RITL.

The Supreme Court set aside the NCLAT's judgment of September 9, 2022. The banks were restored to their status as financial creditors of RITL.

The court also clarified that the shortfall clause was not a contingent contract under Section 32 of the Contract Act (a contract that depends on a future uncertain event). A guarantee, the court said, is a specific type of contract with its own rules. It is not a contingent contract. The distinction matters because contingent contracts and guarantees are treated differently under the IBC.

What this means for lenders and borrowers

For lenders, this judgment is a powerful tool. If a third party signs a deed pledging assets for someone else's loan, and that deed contains a shortfall clause, the lender may now be able to claim as a financial creditor of that third party in insolvency. The title of the document will not protect the third party.

For companies that sign such deeds, the message is clear: read every clause. A deed of hypothecation can become a guarantee. A promise to pay a shortfall can turn a non-borrower into a debtor. The court will look at what the document does, not what it is called.

THE PLAY: Before signing any deed that pledges assets for a related party's loan, check every clause for language that could be read as a personal promise to pay — because the IBC treats a guarantee as financial debt, and financial creditors control the insolvency process.

The banks never lent RITL a single rupee. But a single clause in a deed made them its creditors.