Unilateral variance of public issue terms after successful closure discharges underwriters from all statutory guarantee obligations.

The Appellant (Tomorrowland Ltd.) launched a public issue of Fully Convertible Debentures (FCDs) in 1995, which was fully underwritten by 267 Underwriters

Although the issue closed on 18.02.1995 after being oversubscribed, SEBI subsequently directed the company on 06.03.1995 to provide investors an option to withdraw due to disclosure anomalies

Following mass withdrawals, subscription fell below the mandatory 90% threshold, leading Tomorrowland to issue devolvement notices to Underwriters

Under the Arbitration Act, 1940, a Sole Arbitrator awarded damages (Rs. 80 per FCD) and interest (18% p.a.) against the Underwriters in 2012

On 27.04.2022, a Single Judge of the Delhi High Court affirmed the Underwriters' liability but modified the award by reducing damages to Rs. 20 per FCD and slashing interest rates

Tomorrowland appealed the reductions, while Underwriters cross-appealed challenging the finding of liability itself

The court primarily applied Section 126 of the Indian Contract Act (IC Act) to define the Underwriter as a 'surety'

Section 133, which mandates the discharge of a surety if a variance is made to the contract between the principal debtor and creditor without the surety’s consent

It also relied on Section 128 (co-extensive liability) and Sections 134, 139, 142, and 143 regarding the discharge and invalidity of guarantees

Regarding procedure, the court applied Section 39(1)(iii) and (vi) of the Arbitration Act, 1940, for the maintainability of appeals

Section 28 for the enlargement of time

Precedentially, it followed *State of Maharashtra v. Dr. M.N. Kaul*, establishing that a surety is a "favoured debtor" whose liability must be strictly construed *strictissimi juris*

The Court determined that an underwriting agreement is essentially a contract of guarantee where the Underwriter is the surety, the Issuer (Tomorrowland) is the creditor, and the public subscribers are principal debtors

The Court found that once the public issue was successfully subscribed beyond 90% and closed, the risk the Underwriter guaranteed had ceased

The subsequent act of Tomorrowland—unilaterally allowing subscribers to withdraw per SEBI’s directive without the Underwriter’s consent—constituted a "material variance" under Section 133 of the IC Act

Applying the principle of *strictissimi juris*, the Court reasoned that the creditor cannot unilaterally revive an extinguished risk or enlarge the surety's liability

Therefore, the Underwriters stood statutorily discharged by operation of law the moment the contract was varied, rendering the Arbitrator’s subsequent findings of liability a patent error of law apparent on the face of the record

It ruled that Tomorrowland’s appeals (seeking higher damages/interest) were infructuous because the underlying liability itself was non-existent

The Court allowed the cross-appeals of the Underwriters (HDFC Bank, HSIIDC, DCM Financial, and Dolf Leasing), setting aside the Arbitral Awards and the Single Judge’s judgments insofar as they fastened liability

Tomorrowland’s 24 appeals were dismissed

No order as to costs was made