In UV Asset Reconstruction Company Ltd. v. Electrosteel Castings Ltd.¹, the Supreme Court examined whether a promoter’s contractual commitment to arrange infusion of funds into a borrower company could be construed as a contract of guarantee under Section 126 of the Indian Contract Act, 1872 (“ICA”), and whether the approval of a resolution plan under the Insolvency and Bankruptcy Code, 2016 (“IBC”) extinguishes claims against such promoter. Dismissing the appeal under Section 62 of the IBC, the Court held that an undertaking to infuse funds does not amount to a guarantee and that, in the absence of a valid contract of guarantee, no liability can be imposed on the promoter.

The dispute arose from a financial facility of INR 500 crores availed by Electrosteel Steels Limited (“ESL”) from SREI Infrastructure Finance Limited (“SREI”) in July 2011. The sanction letter governing the transaction did not contemplate any personal or corporate guarantee. Subsequently, Electrosteel Castings Limited (“ECL”), the promoter of ESL, executed a Deed of Undertaking dated 27 July 2011. Under Clause 2.2 of the said deed, ECL agreed to arrange infusion of funds into ESL to ensure compliance with stipulated financial covenants. ECL also created a mortgage over certain properties as security for the facility.

In 2017, ESL was admitted into the corporate insolvency resolution process (“CIRP”). A resolution plan submitted by Vedanta Limited was approved in April 2018, pursuant to which the sustainable portion of the debt was paid upfront and the unsustainable portion was converted into equity. Upon successful implementation of the plan, SREI issued a “no dues certificate” to ESL. Thereafter, SREI assigned the alleged residual claim to UV Asset Reconstruction Company Limited (“ARC”), which initiated proceedings under Section 7 of the IBC against ECL before the National Company Law Tribunal (“NCLT”), asserting that ECL was a corporate guarantor and that its liability survived the resolution plan.

The NCLT dismissed the application, holding that ECL could not be treated as a guarantor and that the debt stood extinguished pursuant to the approved resolution plan. The National Company Law Appellate Tribunal (“NCLAT”) affirmed the finding that ECL was not a guarantor, while clarifying that approval of a resolution plan does not automatically discharge claims against third parties unless the plan expressly provides so. Aggrieved by this decision, ARC approached the Supreme Court.

The principal issue before the Court was whether Clause 2.2 of the Deed of Undertaking constituted a contract of guarantee within the meaning of Section 126 of the ICA. The appellant contended that the clause amounted to a “see to it” guarantee, obligating ECL to ensure repayment of the debt upon default by ESL. Reliance was also placed on certain pleadings and payments made by ECL to argue that the existence of a guarantee stood admitted.

Rejecting these submissions, the Supreme Court reiterated that a contract of guarantee requires a clear, explicit, and unequivocal promise by the surety to discharge the liability of the principal debtor in the event of default. On a plain reading of Clause 2.2, the Court held that the obligation undertaken by ECL was limited to arranging infusion of funds into ESL to enable compliance with financial covenants and did not extend to payment of the lender’s dues or discharge of the borrower’s debt. Such an undertaking, the Court held, cannot be equated with a guarantee under Section 126 of the ICA.

The Court further relied on contemporaneous documents, including the sanction letter, information memorandum, assignment agreement, and financial statements, all of which demonstrated that no guarantee, personal or corporate was ever contemplated or created. It clarified that the concept of a “see to it” obligation under English law, which merely ensures performance by the principal debtor, does not satisfy the statutory requirements of a guarantee under Indian law.

On the issue of the resolution plan, the Court agreed with the NCLAT that approval of a resolution plan does not ipso facto discharge third-party guarantors. However, this issue was rendered academic in the present case, as no valid guarantee existed. Payments made by ECL in its capacity as promoter were held to be voluntary and insufficient to create or imply a contractual guarantee.

Accordingly, the Supreme Court dismissed the appeal, holding that an undertaking to arrange infusion of funds does not constitute a contract of guarantee and that, in the absence of a financial debt or enforceable guarantee, insolvency proceedings against ECL were not maintainable.

By - Akarsh Pandey and Muskan Jain