Full Judgment Text
REPORTABLE
2026 INSC 14
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal No. 9701 of 2024
UV Asset Reconstruction Company Limited ... Appellant
Versus
Electrosteel Castings Limited … Respondent
J U D G M E N T
ALOK ARADHE, J.
INTRODUCTION
1. This appeal under Section 62 of Insolvency and Bankruptcy
Code, 2016 (hereinafter, referred to as the ‘Code’) calls in
question the legality and correctness of the judgment dated
24.01.2024 by the National Company Law Appellate Tribunal
(NCLAT), whereby, the NCLAT affirmed the order dated
24.06.2022 passed by the Adjudicating Authority (NCLT)
rejecting the application filed by the appellant under Section 7
of the Code.
(ii) ISSUE
2. The central issue arising for consideration in the present appeal
Signature Not Verified
Digitally signed by
Jayant Kumar Arora
Date: 2026.01.06
15:48:05 IST
Reason:
pertains to the interpretation of Clause 2.2 of Deed of
Undertaking dated 27.07.2011 executed between SREI
1
Infrastructure Finance Limited (SREI), the original creditor,
which subsequently assigned all its rights and interests in
favour of UV Asset Reconstruction Company Limited, the
appellant; Electrosteel Steels Limited (ESL), the borrower; and
Electrosteel Castings Limited (ECL), the erstwhile promoter of
ESL and obligor in the Deed of Undertaking. The Controversy
lies in determining whether said Clause constitutes a contract of
guarantee within the meaning of Section 126 of the Indian
Contract Act, 1872 (Act) thereby rendering ECL as a guarantor
to SREI in respect of financial facilities availed by ESL from SREI.
(iii) FACTUAL BACKGROUND
3. Briefly stated, the facts leading to filing of present appeal, are as
follows. ESL availed financial assistance of INR 500 crores from
SREI pursuant to sanction letter dated 26.07.2011. Under the
sanction letter, the only security for the facility comprised a
demand promissory note and post-dated cheques. The sanction
letter did not stipulate any requirement for a personal or
corporate guarantee from the ECL. However, ECL being the
promoter of ESL was required to furnish an undertaking to
arrange for the infusion of funds.
2
4. On the same day, SREI issued an addendum to the sanction
letter, providing for an additional security for the facility in the
form of subservient charge over movable and project assets of
ESL. On 26.07.2011 itself, SREI and ESL executed a Rupee Loan
Agreement. Clause (d)(3) of schedule 4 to the loan agreement,
required the ECL to furnish an undertaking to arrange for
infusion of funds to enable ESL, to comply with financial
covenants.
5. In pursuance thereof, ECL, one of the promotors of ESL,
executed a Deed of Undertaking, warranty, and indemnity dated
27.07.2011 (undertaking) whereby it undertook a limited
obligation to arrange for infusion of funds into ESL. Clause 2.2
of the aforesaid guarantee provides that ECL shall arrange for
infusion of such amount of funds into the ESL, as may be
necessary to enable ESL to comply with stipulated financial
covenants.
6. Subsequently on 21.11.2011, ESL, ECL and SREI entered into a
supplementary agreement amending inter alia the facility
agreement and the security package for the facility.
3
(iv) CORPORATE INSOLVENCY RESOLUTION PROCESS OF ESL
7. On 27.06.2017, State Bank of India, one of the lenders of ESL,
filed an application on 27.06.2017 under Section 7 of the Code,
before NCLT Kolkata, which was admitted on 20.07.2017.
Thereafter, by an order dated 17.04.2018, passed under Section
31 (1) of the Code, the NCLT Kolkata, approved the resolution
plan submitted by Vedanta for acquisition of ESL. Under the
approved resolution plan, ESL was acquired for a total
consideration of INR 12,719.14 crores, comprising upfront cash
payment of INR 5,320.00 crores and conversion of balance
amount into equity shares. The resolution plan duly was
implemented.
8. Upon implementation of the resolution plan, SREI issued an
unconditional ‘no due certificate’ to ESL certifying that dues
owned by ESL to SREI stood fully discharged. However, SREI
subsequently claimed that it has been allotted reduced amount
of shares upon conversion of balance debt. On 30.06.2018, SREI
executed a Deed of Assignment (Assignment Deed) in favour of
the appellant, purporting to assign the alleged residual debt.
4
(v) PROCEEDING BEFORE NCLT
9. The appellant thereafter filed an application under Section 7 of
the Code before the NCLT, Cuttack, asserting that; (i) a residual
financial debt, remained payable by ESL despite implementation
of the resolution plan, and (ii) ECL has furnished a corporate
guarantee for the debt of ESL.
10. The NCLT, by order dated 24.06.2022, dismissed the petition
filed by the appellant under Section 7 of the Code on two
principal grounds; (i) ECL was not a guarantor in respect of
financial facilities availed by ESL and, therefore no financial debt
was owed by ECL, and (ii) the conversion of ESL’s debt into
equity under resolution plan resulted in extinguishment of any
liability of ECL.
(vi) PROCEEDING BEFORE NCLAT
11. Aggrieved thereby, the appellant preferred an appeal before the
NCLAT. The NCLAT in its judgment dated 24.01.2024 framed
two specific issues for adjudication namely, (i) whether ECL was
a guarantor to SREI for the financial facilities availed by ESL and
(ii) whether approval of the resolution plan of ESL resulted in
extinguishment, of entire debt, so as to bar any claim against
the ECL as a guarantor or third party surety.
5
12. The NCLAT answered the first issue in the negative, holding that
ECL cannot be construed as a guarantor under Clause 2.2 of
Deed of Undertaking in respect of the financial facility extended
by SREI to ESL. While answering the second issue, it held that
approval of resolution plan extinguished the debt, qua ESL i.e.,
corporate debtor alone. It was further held that such
extinguishment did not by itself, extend to third parties unless
expressly provided in the plan. Nonetheless, the appeal was
dismissed on the primary finding that ECL was not a guarantor.
Hence, the present appeal.
(vii) RIVAL SUBMISSIONS
13. Learned senior counsel for the appellant contended that Clause
2.2 of the Deed of Undertaking, satisfies the requirements of a
contract of guarantee as defined under Section 126 of the Act. It
is submitted that Clause 2.2 envisages the ECL to discharge the
obligation to infuse funds upon default of ESL in compliance of
financial covenants. It is argued that Clause 2.2 involves two
step process of discharging liability as a guarantor namely, (i)
the first step is to fund ESL for such amounts, and (ii) second
step is to eliminate the breach of default on the part of the
borrower. It is submitted that the guarantee in question is “See
6
to it” type guarantee. In support of aforesaid submission,
1
reliance has been placed on the decisions of House of Lords and
2
Court of Appeal .
14.
It is argued that ECL had admitted its status as a guarantor in
3 4
the pleadings before the Madras High Court and this Court and
5
is therefore, estopped from taking a contrary stand. Our
attention has also been invited to the letters dated 30.06.2017
and 20.07.2017 sent by ESL to SREI, evidencing payment of INR
38 Crores by ECL to SREI which according to the appellant,
reinforces the existence of guarantee obligation. It is urged that
NCLAT erred in relying upon the sanction letter dated
26.07.2011 and information memorandum dated 27.10.2017 to
negate the existence of the guarantee and the impugned order
warrants interference in this appeal.
15. On the other hand, learned senior counsel for the respondent
submitted that Clause 2.2 of the Deed of Undertaking, imposed
only an obligation to arrange for infusion of funds and did not
amount to a guarantee under Section 126 of the Act. In support
1
Moschi vs. Lep Air Services Ltd.: 2 WLR 1175 (per Lord Diplock).
2
Associated British Courts vs. Ferryways [2009] EWCA Civ. 189 and Shanghai Shipyard Co. Ltd. vs.
Reignwood International Investment (Group) Co. Ltd.: [2021] EWCA Civ. 1147 .
3
CSD No. 18692 of 2019 and Order dated 05.11.2019 passed by Division Bench of Madras High Court.
4
Judgment dated 26.11.2021 in Civil Appeal No. 6669 of 2021.
5
Mumbai International Airport Pvt. Ltd. vs. Golden Chariot Airport and Ors. (2010) 10 SCC 422 (Para
43-50) and Nagindas Ramdas vs. Dalpatram Ichharam and Ors. (1974) 1 SCC 242 (para 27).
7
of the aforesaid submissions, reliance has been placed on the
6
decisions of Bombay, Karnataka and Delhi High Courts . It is
pointed out that even the appellant in its pleading before NCLAT
has admitted that undertaking is not a contract of guarantee. It
is also pointed out that the sanction letter by SREI does not
envisage facility being secured by any personal or corporate
guarantee. It is contended that ‘see to it’ guarantee is not the
type of guarantee contemplated under Section 126 of the Act and
has not been adopted in Indian Common Law. It is submitted
that ECL made a payment of INR 38 crores to SREI on
20.07.2017 on its own volition, in its capacity as promotor of
ESL. It is further submitted that aforesaid payment was not
made on account of any contractual obligation.
16. It is also urged that, it is well settled, that pleadings must be
read as a whole and cannot be read selectively, out of context or
in isolation. It is pointed out that the pleading was filed by the
ECL in the proceeding initiated by the appellant to enforce
mortgage security created by ECL in favour of SREI. In the said
pleading, it was stated that ECL has given a guarantee which is
6
Yes Bank Limited v. Zee Entertainment Enterprises Limited and Ors, 2020 SCC OnLine Bom 11763
(Paras 50,53,59,62,67), United Breweries (Holding) Ltd. v. Karnataka State Industrial Investment and
Development Corporation Ltd. and Others, 2011 SCC OnLine Kar 4012 (para 6,9) and Aditya Birla
Finance Ltd. vs. Siti Networks, 2023 SCC OnLine Del 1290 (Para 26,237,238).
8
limited only to the mortgage property and the same is not
personal. It is urged that reliance on the decisions in Nagindas
Ramdas and Mumbai International Airport Pvt. Ltd. is
misplaced. It is finally urged that detailed and reasoned orders
passed by the NCLT and NCLAT do not call for any interference
in this appeal.
(viii) ANALYSIS
17. We have given our thoughtful consideration to the rival
submissions and have carefully perused the records. Section
126 of the Act defines a ‘Contract of Guarantee’, as a contract to
perform promise, or discharge the liability, of a third person in
case of his default. The essential ingredients of a guarantee,
therefore, are (a) existence of principal debt, (b) default by the
principal debtor and (c) a promise by the surety to discharge the
liability of the principal debtor upon such default. Thus, a
guarantee is a promise to answer for the payment of some debt,
or the performance of some duty, in case of failure of another
party, who is in the first instance, liable to such payment or
7
performance . A guarantee is a security in the form of right of
action against a third party. In order to constitute a guarantee,
7
Conley (Re), ex p Trustee v Barclays Bank Ltd. (1938) 2 All ER 127, at 130-131 (CA)
9
there has to be a specific undertaking or unambiguous
affirmation to discharge the liability of a third person in case of
their default.
18.
A guarantee is governed by principles of construction generally
8
governing other documents . A guarantee being a mercantile
contract, the Court does not apply to it merely technical rules
but construes it so as to reflect what may fairly be inferred to
have been the parties’ real intention and understanding as
expressed by them in writing and to give effect to it rather than
9
not .
19. Now, we advert to Clause 2.2 of Deed of Undertaking dated
27.07.2011, which reads as under: -
“2.2. Financial Covenants
In the event the Borrower is not in a
position to comply with the
Financial Covenants in the
Financing Documents, or has
breached such Financial Covenants,
the Obligors will arrange for the
infusion of such amount of fund
into the Borrower such that the
Borrower is in a position to comply
with the abovementioned Financial
Covenants.”
8
Raghunandan v. Kirtyanand, AIR 1932 PC 131, Eshelby v Federated European Bank Ltd. (1932) 1 KB
254 and Kamla Devi v. Thakhratmal Land, AIR 1964 SC 859
9 th
Halsbury’s Laws of England, Vol 49, 5 Edition and Perrylease Ltd v Imecar AG, (1987) 2 All ER 378
10
Thus, the aforesaid Clause obligates ECL to arrange for infusion
of funds into ESL, so as to enable the borrower to comply with
the stipulated Financial Covenants.
20.
For an obligation to be construed as a guarantee under Section
126 of the Act, there must be a direct and unambiguous
obligation of the surety to discharge the obligation of the
principal debtor to the creditor. The clause neither records an
undertaking to discharge the debt owed to the creditor nor does
it contemplate payment to the lender in the event of the default.
The clause contains a promise, not to the creditor to pay the debt
upon default, but to the borrower to facilitate compliance with
Financial Covenants. An undertaking to infuse funds into a
borrower, so that it may meet its obligations cannot, by itself be
equated with the promise to discharge the borrower’s liability to
the creditor. A mere Covenant to ensure financial discipline or
infusion of funds does not satisfy the statutory requirements of
Section 126 of the Act.
21. The sanction letter dated 26.07.2011 does not contemplate any
personal or corporate guarantee. On the contrary, it specifically
identifies the securities for the facilities and does not require
ECL to stand as surety. The fact that no guarantee was furnished
11
by ECL is also borne out from the following documents: (i)
information memorandum in the CIRP of ESL does not reflect
any guarantee from the Respondent in connection with SREI’s
Facility under the category of Guarantee or Security Interest; (ii)
In Schedule 1 to the Assignment Agreement, against the column
titled “details of the guarantor/co-borrower”, the parties to
Assignment Agreement stated ‘Nil’ and (iii) Audited Financial
Statement of ESL does not reflect any guarantee obligation
towards SREI. Thus, contemporaneous documents reinforce the
conclusion that parties never intended to create a contract of
guarantee.
22. Section 126 of the Act mandates a guarantor to ‘perform a
promise’ or ‘discharge the liability’ of a third person which
necessarily implies a direct performance or discharge. A ‘See to
it’ guarantee in English Common Law refers to an obligation
upon the guarantor to ensure that principal debtor itself,
performs its own obligation and the guarantor, therefore, is in
breach as soon as principal debtor fails to perform. However, a
‘See to it’ guarantee does not include an obligation to enable the
principal debtor to perform its own obligation. Such an
12
arrangement would not be a guarantee under Section 126 of the
Act.
23. It is pertinent to note that payment of an amount of INR 38
crores by ECL to the appellant was not made on account of any
contractual obligation. The said payment was made on
20.07.2017 in its capacity as a promotor of ESL. Such payment
by itself does not give rise to any contract of guarantee,
particularly when there is no contractual obligation of guarantee
in the Deed of Undertaking.
24. It is well settled in law, that, pleadings must be read as a whole
and cannot be read selectively out of context or in isolation. The
appellant had initiated an action to enforce the mortgage
security created by ECL in favour of SREI. In the aforesaid
proceeding, ECL in its pleadings stated that it has given a
guarantee which is limited to the mortgaged property with no
personal recourse to ECL. The reliance of the appellant on the
decisions of Nagindas Ramdas and Mumbai International
Airport Pvt. Ltd., is misconceived, as the aforesaid decisions
are an authority for the proposition that if admissions are true
and clear, they are the best proof of facts, admitted in the context
of Section 58 of the Indian Evidence Act, 1872. Therefore, the
13
aforesaid decisions have no application to the fact situation of
the case.
(ix) CONCLUSION
25.
For the aforementioned reasons, we concur with the concurrent
findings of NCLT and NCLAT that Clause 2.2 of the Deed of
Undertaking does not constitute a contract of guarantee and
that ECL cannot be treated as guarantor for the financial
facilities availed by ESL. We, therefore, do not find any infirmity
in the impugned judgment warranting interference in this
appeal.
26. In the result, the appeal is dismissed. There shall be no order as
to costs.
……………………J.
[SANJAY KUMAR]
..………………….J.
[ALOK ARADHE]
NEW DELHI;
JANUARY 06, 2026.
14
2026 INSC 14
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal No. 9701 of 2024
UV Asset Reconstruction Company Limited ... Appellant
Versus
Electrosteel Castings Limited … Respondent
J U D G M E N T
ALOK ARADHE, J.
INTRODUCTION
1. This appeal under Section 62 of Insolvency and Bankruptcy
Code, 2016 (hereinafter, referred to as the ‘Code’) calls in
question the legality and correctness of the judgment dated
24.01.2024 by the National Company Law Appellate Tribunal
(NCLAT), whereby, the NCLAT affirmed the order dated
24.06.2022 passed by the Adjudicating Authority (NCLT)
rejecting the application filed by the appellant under Section 7
of the Code.
(ii) ISSUE
2. The central issue arising for consideration in the present appeal
Signature Not Verified
Digitally signed by
Jayant Kumar Arora
Date: 2026.01.06
15:48:05 IST
Reason:
pertains to the interpretation of Clause 2.2 of Deed of
Undertaking dated 27.07.2011 executed between SREI
1
Infrastructure Finance Limited (SREI), the original creditor,
which subsequently assigned all its rights and interests in
favour of UV Asset Reconstruction Company Limited, the
appellant; Electrosteel Steels Limited (ESL), the borrower; and
Electrosteel Castings Limited (ECL), the erstwhile promoter of
ESL and obligor in the Deed of Undertaking. The Controversy
lies in determining whether said Clause constitutes a contract of
guarantee within the meaning of Section 126 of the Indian
Contract Act, 1872 (Act) thereby rendering ECL as a guarantor
to SREI in respect of financial facilities availed by ESL from SREI.
(iii) FACTUAL BACKGROUND
3. Briefly stated, the facts leading to filing of present appeal, are as
follows. ESL availed financial assistance of INR 500 crores from
SREI pursuant to sanction letter dated 26.07.2011. Under the
sanction letter, the only security for the facility comprised a
demand promissory note and post-dated cheques. The sanction
letter did not stipulate any requirement for a personal or
corporate guarantee from the ECL. However, ECL being the
promoter of ESL was required to furnish an undertaking to
arrange for the infusion of funds.
2
4. On the same day, SREI issued an addendum to the sanction
letter, providing for an additional security for the facility in the
form of subservient charge over movable and project assets of
ESL. On 26.07.2011 itself, SREI and ESL executed a Rupee Loan
Agreement. Clause (d)(3) of schedule 4 to the loan agreement,
required the ECL to furnish an undertaking to arrange for
infusion of funds to enable ESL, to comply with financial
covenants.
5. In pursuance thereof, ECL, one of the promotors of ESL,
executed a Deed of Undertaking, warranty, and indemnity dated
27.07.2011 (undertaking) whereby it undertook a limited
obligation to arrange for infusion of funds into ESL. Clause 2.2
of the aforesaid guarantee provides that ECL shall arrange for
infusion of such amount of funds into the ESL, as may be
necessary to enable ESL to comply with stipulated financial
covenants.
6. Subsequently on 21.11.2011, ESL, ECL and SREI entered into a
supplementary agreement amending inter alia the facility
agreement and the security package for the facility.
3
(iv) CORPORATE INSOLVENCY RESOLUTION PROCESS OF ESL
7. On 27.06.2017, State Bank of India, one of the lenders of ESL,
filed an application on 27.06.2017 under Section 7 of the Code,
before NCLT Kolkata, which was admitted on 20.07.2017.
Thereafter, by an order dated 17.04.2018, passed under Section
31 (1) of the Code, the NCLT Kolkata, approved the resolution
plan submitted by Vedanta for acquisition of ESL. Under the
approved resolution plan, ESL was acquired for a total
consideration of INR 12,719.14 crores, comprising upfront cash
payment of INR 5,320.00 crores and conversion of balance
amount into equity shares. The resolution plan duly was
implemented.
8. Upon implementation of the resolution plan, SREI issued an
unconditional ‘no due certificate’ to ESL certifying that dues
owned by ESL to SREI stood fully discharged. However, SREI
subsequently claimed that it has been allotted reduced amount
of shares upon conversion of balance debt. On 30.06.2018, SREI
executed a Deed of Assignment (Assignment Deed) in favour of
the appellant, purporting to assign the alleged residual debt.
4
(v) PROCEEDING BEFORE NCLT
9. The appellant thereafter filed an application under Section 7 of
the Code before the NCLT, Cuttack, asserting that; (i) a residual
financial debt, remained payable by ESL despite implementation
of the resolution plan, and (ii) ECL has furnished a corporate
guarantee for the debt of ESL.
10. The NCLT, by order dated 24.06.2022, dismissed the petition
filed by the appellant under Section 7 of the Code on two
principal grounds; (i) ECL was not a guarantor in respect of
financial facilities availed by ESL and, therefore no financial debt
was owed by ECL, and (ii) the conversion of ESL’s debt into
equity under resolution plan resulted in extinguishment of any
liability of ECL.
(vi) PROCEEDING BEFORE NCLAT
11. Aggrieved thereby, the appellant preferred an appeal before the
NCLAT. The NCLAT in its judgment dated 24.01.2024 framed
two specific issues for adjudication namely, (i) whether ECL was
a guarantor to SREI for the financial facilities availed by ESL and
(ii) whether approval of the resolution plan of ESL resulted in
extinguishment, of entire debt, so as to bar any claim against
the ECL as a guarantor or third party surety.
5
12. The NCLAT answered the first issue in the negative, holding that
ECL cannot be construed as a guarantor under Clause 2.2 of
Deed of Undertaking in respect of the financial facility extended
by SREI to ESL. While answering the second issue, it held that
approval of resolution plan extinguished the debt, qua ESL i.e.,
corporate debtor alone. It was further held that such
extinguishment did not by itself, extend to third parties unless
expressly provided in the plan. Nonetheless, the appeal was
dismissed on the primary finding that ECL was not a guarantor.
Hence, the present appeal.
(vii) RIVAL SUBMISSIONS
13. Learned senior counsel for the appellant contended that Clause
2.2 of the Deed of Undertaking, satisfies the requirements of a
contract of guarantee as defined under Section 126 of the Act. It
is submitted that Clause 2.2 envisages the ECL to discharge the
obligation to infuse funds upon default of ESL in compliance of
financial covenants. It is argued that Clause 2.2 involves two
step process of discharging liability as a guarantor namely, (i)
the first step is to fund ESL for such amounts, and (ii) second
step is to eliminate the breach of default on the part of the
borrower. It is submitted that the guarantee in question is “See
6
to it” type guarantee. In support of aforesaid submission,
1
reliance has been placed on the decisions of House of Lords and
2
Court of Appeal .
14.
It is argued that ECL had admitted its status as a guarantor in
3 4
the pleadings before the Madras High Court and this Court and
5
is therefore, estopped from taking a contrary stand. Our
attention has also been invited to the letters dated 30.06.2017
and 20.07.2017 sent by ESL to SREI, evidencing payment of INR
38 Crores by ECL to SREI which according to the appellant,
reinforces the existence of guarantee obligation. It is urged that
NCLAT erred in relying upon the sanction letter dated
26.07.2011 and information memorandum dated 27.10.2017 to
negate the existence of the guarantee and the impugned order
warrants interference in this appeal.
15. On the other hand, learned senior counsel for the respondent
submitted that Clause 2.2 of the Deed of Undertaking, imposed
only an obligation to arrange for infusion of funds and did not
amount to a guarantee under Section 126 of the Act. In support
1
Moschi vs. Lep Air Services Ltd.: 2 WLR 1175 (per Lord Diplock).
2
Associated British Courts vs. Ferryways [2009] EWCA Civ. 189 and Shanghai Shipyard Co. Ltd. vs.
Reignwood International Investment (Group) Co. Ltd.: [2021] EWCA Civ. 1147 .
3
CSD No. 18692 of 2019 and Order dated 05.11.2019 passed by Division Bench of Madras High Court.
4
Judgment dated 26.11.2021 in Civil Appeal No. 6669 of 2021.
5
Mumbai International Airport Pvt. Ltd. vs. Golden Chariot Airport and Ors. (2010) 10 SCC 422 (Para
43-50) and Nagindas Ramdas vs. Dalpatram Ichharam and Ors. (1974) 1 SCC 242 (para 27).
7
of the aforesaid submissions, reliance has been placed on the
6
decisions of Bombay, Karnataka and Delhi High Courts . It is
pointed out that even the appellant in its pleading before NCLAT
has admitted that undertaking is not a contract of guarantee. It
is also pointed out that the sanction letter by SREI does not
envisage facility being secured by any personal or corporate
guarantee. It is contended that ‘see to it’ guarantee is not the
type of guarantee contemplated under Section 126 of the Act and
has not been adopted in Indian Common Law. It is submitted
that ECL made a payment of INR 38 crores to SREI on
20.07.2017 on its own volition, in its capacity as promotor of
ESL. It is further submitted that aforesaid payment was not
made on account of any contractual obligation.
16. It is also urged that, it is well settled, that pleadings must be
read as a whole and cannot be read selectively, out of context or
in isolation. It is pointed out that the pleading was filed by the
ECL in the proceeding initiated by the appellant to enforce
mortgage security created by ECL in favour of SREI. In the said
pleading, it was stated that ECL has given a guarantee which is
6
Yes Bank Limited v. Zee Entertainment Enterprises Limited and Ors, 2020 SCC OnLine Bom 11763
(Paras 50,53,59,62,67), United Breweries (Holding) Ltd. v. Karnataka State Industrial Investment and
Development Corporation Ltd. and Others, 2011 SCC OnLine Kar 4012 (para 6,9) and Aditya Birla
Finance Ltd. vs. Siti Networks, 2023 SCC OnLine Del 1290 (Para 26,237,238).
8
limited only to the mortgage property and the same is not
personal. It is urged that reliance on the decisions in Nagindas
Ramdas and Mumbai International Airport Pvt. Ltd. is
misplaced. It is finally urged that detailed and reasoned orders
passed by the NCLT and NCLAT do not call for any interference
in this appeal.
(viii) ANALYSIS
17. We have given our thoughtful consideration to the rival
submissions and have carefully perused the records. Section
126 of the Act defines a ‘Contract of Guarantee’, as a contract to
perform promise, or discharge the liability, of a third person in
case of his default. The essential ingredients of a guarantee,
therefore, are (a) existence of principal debt, (b) default by the
principal debtor and (c) a promise by the surety to discharge the
liability of the principal debtor upon such default. Thus, a
guarantee is a promise to answer for the payment of some debt,
or the performance of some duty, in case of failure of another
party, who is in the first instance, liable to such payment or
7
performance . A guarantee is a security in the form of right of
action against a third party. In order to constitute a guarantee,
7
Conley (Re), ex p Trustee v Barclays Bank Ltd. (1938) 2 All ER 127, at 130-131 (CA)
9
there has to be a specific undertaking or unambiguous
affirmation to discharge the liability of a third person in case of
their default.
18.
A guarantee is governed by principles of construction generally
8
governing other documents . A guarantee being a mercantile
contract, the Court does not apply to it merely technical rules
but construes it so as to reflect what may fairly be inferred to
have been the parties’ real intention and understanding as
expressed by them in writing and to give effect to it rather than
9
not .
19. Now, we advert to Clause 2.2 of Deed of Undertaking dated
27.07.2011, which reads as under: -
“2.2. Financial Covenants
In the event the Borrower is not in a
position to comply with the
Financial Covenants in the
Financing Documents, or has
breached such Financial Covenants,
the Obligors will arrange for the
infusion of such amount of fund
into the Borrower such that the
Borrower is in a position to comply
with the abovementioned Financial
Covenants.”
8
Raghunandan v. Kirtyanand, AIR 1932 PC 131, Eshelby v Federated European Bank Ltd. (1932) 1 KB
254 and Kamla Devi v. Thakhratmal Land, AIR 1964 SC 859
9 th
Halsbury’s Laws of England, Vol 49, 5 Edition and Perrylease Ltd v Imecar AG, (1987) 2 All ER 378
10
Thus, the aforesaid Clause obligates ECL to arrange for infusion
of funds into ESL, so as to enable the borrower to comply with
the stipulated Financial Covenants.
20.
For an obligation to be construed as a guarantee under Section
126 of the Act, there must be a direct and unambiguous
obligation of the surety to discharge the obligation of the
principal debtor to the creditor. The clause neither records an
undertaking to discharge the debt owed to the creditor nor does
it contemplate payment to the lender in the event of the default.
The clause contains a promise, not to the creditor to pay the debt
upon default, but to the borrower to facilitate compliance with
Financial Covenants. An undertaking to infuse funds into a
borrower, so that it may meet its obligations cannot, by itself be
equated with the promise to discharge the borrower’s liability to
the creditor. A mere Covenant to ensure financial discipline or
infusion of funds does not satisfy the statutory requirements of
Section 126 of the Act.
21. The sanction letter dated 26.07.2011 does not contemplate any
personal or corporate guarantee. On the contrary, it specifically
identifies the securities for the facilities and does not require
ECL to stand as surety. The fact that no guarantee was furnished
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by ECL is also borne out from the following documents: (i)
information memorandum in the CIRP of ESL does not reflect
any guarantee from the Respondent in connection with SREI’s
Facility under the category of Guarantee or Security Interest; (ii)
In Schedule 1 to the Assignment Agreement, against the column
titled “details of the guarantor/co-borrower”, the parties to
Assignment Agreement stated ‘Nil’ and (iii) Audited Financial
Statement of ESL does not reflect any guarantee obligation
towards SREI. Thus, contemporaneous documents reinforce the
conclusion that parties never intended to create a contract of
guarantee.
22. Section 126 of the Act mandates a guarantor to ‘perform a
promise’ or ‘discharge the liability’ of a third person which
necessarily implies a direct performance or discharge. A ‘See to
it’ guarantee in English Common Law refers to an obligation
upon the guarantor to ensure that principal debtor itself,
performs its own obligation and the guarantor, therefore, is in
breach as soon as principal debtor fails to perform. However, a
‘See to it’ guarantee does not include an obligation to enable the
principal debtor to perform its own obligation. Such an
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arrangement would not be a guarantee under Section 126 of the
Act.
23. It is pertinent to note that payment of an amount of INR 38
crores by ECL to the appellant was not made on account of any
contractual obligation. The said payment was made on
20.07.2017 in its capacity as a promotor of ESL. Such payment
by itself does not give rise to any contract of guarantee,
particularly when there is no contractual obligation of guarantee
in the Deed of Undertaking.
24. It is well settled in law, that, pleadings must be read as a whole
and cannot be read selectively out of context or in isolation. The
appellant had initiated an action to enforce the mortgage
security created by ECL in favour of SREI. In the aforesaid
proceeding, ECL in its pleadings stated that it has given a
guarantee which is limited to the mortgaged property with no
personal recourse to ECL. The reliance of the appellant on the
decisions of Nagindas Ramdas and Mumbai International
Airport Pvt. Ltd., is misconceived, as the aforesaid decisions
are an authority for the proposition that if admissions are true
and clear, they are the best proof of facts, admitted in the context
of Section 58 of the Indian Evidence Act, 1872. Therefore, the
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aforesaid decisions have no application to the fact situation of
the case.
(ix) CONCLUSION
25.
For the aforementioned reasons, we concur with the concurrent
findings of NCLT and NCLAT that Clause 2.2 of the Deed of
Undertaking does not constitute a contract of guarantee and
that ECL cannot be treated as guarantor for the financial
facilities availed by ESL. We, therefore, do not find any infirmity
in the impugned judgment warranting interference in this
appeal.
26. In the result, the appeal is dismissed. There shall be no order as
to costs.
……………………J.
[SANJAY KUMAR]
..………………….J.
[ALOK ARADHE]
NEW DELHI;
JANUARY 06, 2026.
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