### Unilateral mid-issue withdrawal of subscribers without underwriter's consent statutorily discharges the surety’s liability.

Tommorrowland Ltd. launched a public issue of Fully Convertible Debentures (FCDs) in February 1995, which was fully underwritten by 267 underwriters, including HDFC Bank.

Although the issue was initially fully subscribed and closed on 18.02.1995, SEBI later directed the company to provide an option to investors to withdraw their applications due to anomalies in the offer price.

Following mass withdrawals, subscription fell below the mandatory 90% threshold.

Devolvement notices were sent to underwriters, who refused to pay, leading to a reference to arbitration under the Arbitration Act, 1940.

The Sole Arbitrator awarded damages (Rs. 80 per FCD) plus 18% interest.

On a challenge under Sections 30 and 33 of the 1940 Act, the Single Judge affirmed the underwriters' liability but reduced damages to Rs. 20 per FCD and slashed the interest rates.

Both the issuer and various underwriters filed cross-appeals under Section 39.

The Court applied Section 39(1)(iii) and (vi) of the Arbitration Act, 1940, regarding the maintainability of appeals against orders modifying or refusing to set aside an award.

It relied on Section 28 of the 1940 Act, which grants the Court discretionary power to enlarge time for making an award even after its pronouncement.

Crucially, the Court applied Chapter VIII of the Indian Contract Act, 1872, specifically Section 126 (definition of guarantee), Section 128 (co-extensive liability), and Sections 133 and 134 regarding the discharge of a surety.

Section 133 mandates that any variance made without the surety’s consent in the terms of the contract between the principal debtor and creditor discharges the surety.

It followed the precedent in *State of Maharashtra v. Dr. M.N. Kaul*, holding that a surety is a "favoured debtor" and a guarantee must be construed strictissimi juris.

The Court held that underwriting agreements are essentially contracts of guarantee where the underwriter (surety) ensures the issuer (creditor) receives subscription from the public (principal debtor).

While the Single Judge had focused on the mechanics of the Underwriting Agreement, the Division Bench found that the legal substratum changed when Tommorrowland unilaterally allowed subscribers to withdraw applications following SEBI's 06.03.1995 letter.

This act, done without the Underwriters' consent, constituted a "material variance" under Section 133 of the Indian Contract Act.

Since the risk originally guaranteed was limited to the initial subscription period, the issuer's post-closure alteration of the contract with subscribers triggered an automatic and irrevocable statutory discharge of the Underwriters.

The Court determined that the Arbitrator and Single Judge committed a patent error of law by ignoring these mandatory statutory provisions, which override conflicting contractual clauses.

It held that the Underwriters bore no liability whatsoever as they stood discharged by operation of law under the Indian Contract Act.

Consequently, the twenty-four appeals filed by Tommorrowland Ltd. (seeking higher damages and interest) were dismissed as infructuous, as the underlying liability itself was extinguished.

The Court invoked Order XLI Rule 33 of the CPC to grant relief even to those Underwriters who had not filed appeals, to ensure legal consistency.

No costs were ordered.