Summary
| Category | Data |
|---|---|
| Court | Supreme Court of India |
| Case Number | C.A. No.-009701 of 2024 |
| Diary Number | 11108/2024 |
| Judge Name | HON’BLE MR. JUSTICE ALOK ARADHE |
| Bench |
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| Concurring or Dissenting Judges |
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| Precedent Value | Binding on all subordinate courts and tribunals on interpretation of “contract of guarantee” under Section 126 |
| Overrules / Affirms | Affirms concurrent findings of NCLT and NCLAT |
| Type of Law |
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| Questions of Law | Whether Clause 2.2 of a Deed of Undertaking—an obligation to arrange fund-infusion for compliance with financial covenants—constitutes a “contract of guarantee” under Section 126 of the Contract Act. |
| Ratio Decidendi | The Court held that a valid contract of guarantee under Section 126 requires an unambiguous promise to pay or discharge the principal debtor’s liability to the creditor, triggered by the debtor’s default. Clause 2.2 merely obligates the promisor to infuse funds into the borrower to enable covenant compliance and does not promise performance or discharge of ESL’s debt to the creditor. In the absence of a direct undertaking to pay the lender, and given contemporaneous documents showing “Nil” against any guarantor obligation, there is no contract of guarantee. English “see-to-it” guarantees—in which the surety must ensure the principal itself performs—do not equate to a fund-infusion promise and fall outside Section 126. Accordingly, ECL cannot be treated as surety for ESL’s borrowings. |
| Judgments Relied Upon |
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| Logic / Jurisprudence / Authorities Relied Upon |
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| Facts as Summarised by the Court | ESL borrowed ₹500 crores from SREI under a sanction letter (demand promissory note + post-dated cheques). No guarantee was required, but ECL (promoter) executed a Deed of Undertaking dated 27.07.2011 (Clause 2.2) to arrange fund-infusion for covenant compliance. On insolvency, ARC (assignee of SREI) claimed a residual debt and sought to enforce ECL as guarantor. NCLT and NCLAT held Clause 2.2 is not a guarantee and that the resolution plan’s debt discharge did not extend to third parties. |
Practical Impact
| Category | Impact |
|---|---|
| Binding On | All subordinate courts, NCLTs and NCLATs on the construction of Section 126 “contract of guarantee” |
| Persuasive For | High Courts and Supreme Court benches in contract-guarantee disputes |
| Distinguishes | English “see-to-it” guarantee jurisprudence (House of Lords / EWCA) from Indian statutory guarantee under Section 126 |
| Follows | Precedents on guarantee construction: Conley (Re), Raghunandan, Eshelby |
What’s New / What Lawyers Should Note
- Clause obligating a promoter to “arrange for infusion of funds” does not by itself create a statutory guarantee under Section 126.
- A valid guarantee requires an unambiguous promise to pay or discharge the debt to the creditor, not merely a covenant to support the borrower.
- English “see-to-it” guarantees—obligating a surety to ensure principal performance—are not assimilable to an “arrange funds” promise under Indian law.
- Contemporaneous documents (sanction letter, information memorandum, assignment schedules, audited financials) are decisive in construing guarantee intent.
- Prior admissions or payments (e.g., ₹38 crore by ECL) absent a contractual guarantee obligation will not convert a fund-infusion undertaking into a guarantee.
Summary of Legal Reasoning
- Section 126 defines a guarantee as a contract to perform a promise or discharge a third party’s liability upon default—requiring a direct promise to the creditor.
- Clause 2.2 obligates ECL to infuse funds into ESL so it can meet its covenants; it neither promises to pay the lender nor to discharge ESL’s debt.
- Guarantee construction follows commercial contract principles; courts give effect to parties’ real intention, not technical form.
- Contemporaneous records (sanction letter, loan and assignment documents, audited statements) show no personal or corporate guarantee by ECL, with “Nil” entries under guarantor fields.
- English “see-to-it” guarantee jurisprudence mandates ensuring principal performance, not an obligation to enable performance—thus outside Section 126’s scope.
- Voluntary payment by ECL (₹38 crore) as promoter does not create a contract of guarantee where none existed.
- Pleadings must be read contextually; prior admissions of a limited mortgage guarantee cannot be selectively relied on to establish a broader corporate guarantee.
Arguments by the Parties
Petitioner (UV ARC / Appellant)
- Clause 2.2 satisfies Section 126: a two-step “see-to-it” guarantee—(i) infuse funds; (ii) eliminate borrower default.
- ECL’s own pleadings and admissions in earlier proceedings estop it from denying guarantor status.
- ₹38 crore infusion by ECL post-default evidences guarantee obligation.
- NCLAT erred in focusing on the sanction letter and information memorandum.
Respondent (ECL)
- Clause 2.2 imposes only an obligation to arrange funds, not to pay the creditor or discharge ESL’s debt.
- Sanction letter did not require any guarantee; contemporaneous documents record no surety.
- “See-to-it” guarantees are not recognized under Indian law’s Section 126.
- ₹38 crore payment was voluntary, in capacity as promoter, not under any contractual guarantee obligation.
- Pleadings taken out of context; prior statements limited to mortgage security, not a personal guarantee.
Factual Background
Electrosteel Steels Limited (ESL) borrowed ₹500 crores from SREI under a sanction letter dated 26.07.2011 (secured by demand promissory note and cheques). Although no guarantee was required, ESL’s promoter, Electrosteel Castings Limited (ECL), executed a Deed of Undertaking on 27.07.2011 (Clause 2.2) to arrange fund-infusion for covenant compliance. After insolvency proceedings and approval of a resolution plan, ARC (assignee of SREI) claimed residual debt and sought to enforce ECL as guarantor. NCLT and NCLAT rejected guarantee characterization and held there was no financial debt owed by ECL.
Statutory Analysis
- Section 126, Indian Contract Act: defines “contract of guarantee” as a promise to answer for payment or discharge a third party’s liability upon default.
- Essential ingredients: (i) existence of principal debt; (ii) default by principal debtor; (iii) surety’s promise to creditor.
- Guarantee construction: commercial and purposive approach, giving effect to parties’ clear intention.
- English “see-to-it” guarantee jurisprudence clarified (Conley (Re); Moschi) but distinguished as not providing direct discharge to creditor.
Dissenting / Concurring Opinion Summary
- No dissent.
- Concurrence by Justice Pamidighantam Sri Narasimha endorsing the principle that a promise to arrange funds is not a statutory guarantee.
Alert Indicators
- 🚨 Breaking Precedent – No
- ✔ Precedent Followed – Yes (affirming established Section 126 jurisprudence)
- ⚖️ Split Verdict – No
- 📅 Time-Sensitive – No
- 🔄 Conflicting Decisions – Distinguished English “see-to-it” guarantee authorities