### Unilateral variation of subscription terms without Underwriter's consent operates as statutory discharge of surety’s liability Case Summary: In a batch of twenty-eight appeals under the Arbitration Act, 1940, the Delhi High Court set aside arbitral awards and a Single Judge's decree involving Tommorrowland Ltd. and multiple Underwriters. The core dispute arose from a 1995 public issue where, following a successful subscription, SEBI directed the issuer to grant investors a withdrawal option due to disclosure anomalies. When subsequent withdrawals caused the subscription to fall below the mandatory 90% threshold, Tommorrowland sought to enforce underwriting obligations. The Court held that an Underwriting Agreement performs the function of a contract of guarantee under Chapter VIII of the Indian Contract Act, 1872. Applying Section 133, the Court ruled that Tommorrowland's unilateral act of permitting withdrawals—without the Underwriters' consent—fundamentally altered the contractual framework and the risk originally undertaken. This material variance resulted in an automatic and irrevocable statutory discharge of the Underwriters (sureties). Consequently, the Court found that no enforceable liability subsisted once the issue had been successfully closed, rendering the subsequent devolvement notices and arbitral awards legally unsustainable.

Tommorrowland Limited (formerly M.S. Shoes East Limited) launched a public issue of Fully Convertible Debentures (FCDs) in 1995, which was fully underwritten by 267 underwriters.

The issue was initially oversubscribed and closed on the earliest closing date, 18.02.1995.

However, following SEBI directions regarding disclosure anomalies, the company offered subscribers a withdrawal option on 06.03.1995.

Mass withdrawals caused the subscription to fall below the mandatory 90% threshold, leading the company to issue devolvement notices to underwriters.

After a prolonged delay, disputes were referred to a Sole Arbitrator under the 1940 Arbitration Act.

The Arbitrator awarded damages against the underwriters at Rs. 80 per FCD plus 18% interest.

A Single Judge of the Delhi High Court affirmed the liability but reduced damages to Rs. 20 per FCD and lowered the interest rates.

Both the company and the underwriters preferred appeals under Section 39 of the 1940 Act.

The Court primarily applied Section 39 of the Arbitration Act, 1940, which specifies appealable orders, including those refusing to set aside an award.

It relied on Section 28 of the 1940 Act, which empowers the court to enlarge time for making an award even after the award has been made.

Crucially, the court applied the principles of Suretyship and Guarantee under Chapter VIII (Sections 126, 128, 133, and 134) of the Indian Contract Act, 1872.

It derived the principle strictissimi juris from State of Maharashtra v. Dr. M.N. Kaul, holding that a guarantor’s liability is strictly confined to the terms of the engagement and is discharged by any variance made without the surety's consent.

The Court reasoned that an underwriting agreement is essentially a contract of guarantee where the underwriter is the "surety" and the company the "creditor".

While the initial issue met the 90% subscription threshold, the company's unilateral decision—prompted by SEBI but executed without the underwriters' consent—to allow subscribers to withdraw applications constituted a "material variance" in the contract terms.

Under Section 133 of the Indian Contract Act, such a variance automatically and irrevocably discharges the surety.

The Court found that both the Arbitrator and the Single Judge committed a manifest error of law by failing to apply these mandatory statutory protections for "favoured debtors" (sureties).

Consequently, the subsequent devolvement notices were legally ineffective as the underlying liability had already been extinguished by operation of law.

The Court utilized Order XLI Rule 33 of the CPC to extend this relief even to underwriters who had not filed appeals, ensuring judicial consistency.

It allowed the appeals of the Underwriters (e.g., FAO(OS) 85/2022, 116/2022, 140/2022, 125/2022) and set aside the Arbitral Awards and the Impugned Judgments.

The appeals filed by Tommorrowland Limited seeking higher damages/interest were dismissed as infructuous, as the foundational liability was non-existent.

No order was made as to costs.