Diageo’s pledge over Vijay Mallya’s UBL shares prevails over banks’ personal guarantee, Karnataka High Court rules

Kingfisher Airlines defaulted on loans advanced by a consortium of banks under a Master Debt Recast Agreement (MDRA); Dr. Vijay Mallya and United Breweries (Holdings) Ltd. had provided guarantees.

Separately, Watson Ltd., an overseas company associated with Dr. Mallya, borrowed from ICICI Bank UK, and UBL shares were later pledged to ICICI as security.

In 2013, SCB advanced Watson USD 135 million, part of which repaid the ICICI debt; Dr. Mallya and his son then executed a fresh pledge of UBL shares in favour of SCB’s security trustee.

Diageo Holdings Netherlands B.V. (Diageo), which had guaranteed Watson’s obligations to SCB, paid approximately USD 140.97 million after Watson’s default and claimed subrogation to SCB’s rights over the pledged shares.

The DRT made orders affecting the shares and, on 19 January 2017, allowed the banks’ applications; the DRAT upheld that order on 9 October 2018.

The Recovery Officer had also attached the shares on 3 June 2017. Diageo challenged those orders in the two writ petitions.

1. Whether the 2009 Non-Disposal and Safety Net Arrangement Agreement concerning UBL shares created a security interest.

2. Whether the 2013 SCB–Watson Facility Agreement was a refinancing or assignment of the ICICI loan, or a separate loan transaction.

3. Whether Dr. Mallya’s personal guarantee and negative covenant under the MDRA affected the later SCB facility and pledge.

4. Whether the alleged oral undertaking before the DRT overrode the 2013 facility and pledge agreements.

5. Whether Dr. Mallya’s personal guarantee could create a charge over UBL shares jointly held with his son.

6. Whether the banks could continue to claim the UBL shares after recovery of assets substantially exceeding the amount claimed in the DRT proceedings.

Under Section 172 of the Indian Contract Act, 1872, a pledge is a bailment of goods as security; delivery, actual or constructive, is essential, and the pledgee obtains a special property in the pledged goods (Lallan Prasad v. Rahmat Ali; Maharashtra State Co-operative Bank Ltd. v. Provident Fund Commissioner).

A personal guarantee creates personal liability under Section 128 of the Contract Act, but does not, without more, create a proprietary interest or charge over the guarantor’s assets; a negative covenant or undertaking is not itself a charge unless the instrument demonstrates an intention to make identified property security (Bank of India Ltd. v. Rustom Fakirji Cowasjee; Haryana Financial Corporation v. Gurcharan Singh).

A valid pledge ordinarily prevails over the claims of an unsecured creditor (Bank of Bihar v. State of Bihar).

An undertaking to a court must be clearly given and recorded, and breach does not automatically invalidate a later transaction (Babu Ram Gupta v. Sudhir Bhasin; Rama Narang v. Ramesh Narang).

A surety’s co-extensive personal liability does not itself create security over jointly owned property (SBI v. Indexport Registered; Bank of Bihar Ltd. v. Dr. Damodar Prasad).

The Court treated the SCB facility as a distinct transaction: the ICICI arrangements and pledge were discharged when the ICICI debt was repaid, and a new pledge was created in 2013 to secure SCB’s facility.

The banks’ rights under the MDRA rested on a personal guarantee and a general negative covenant, not a proprietary charge over the specifically pledged UBL shares; accordingly, the SCB pledge, to which Diageo was subrogated after payment, had priority over the banks’ unsecured claim.

The alleged oral undertaking, not recorded in the DRT’s order, did not itself create a charge or automatically nullify the later pledge; any breach would instead be addressed through appropriate enforcement or contempt proceedings.

Dr. Mallya’s guarantee also could not burden shares jointly held with his son, who was not a guarantor under the MDRA.

Finally, the Court considered the reported recovery of assets worth INR 14,131.6 crores against the banks’ claim of INR 6,203 crores and found no justification for their continued claim over the shares.

It allowed both writ petitions and set aside the impugned judgments and orders; pending applications were disposed of.