Promise To Arrange Funds In Case of Default Does Not Make Promoter A Guarantor: Supreme Court

The Supreme Court of India has held that a promoter's promise to arrange funds to help a borrower meet financial covenants does not amount to a contract of guarantee under the Indian Contract Act and cannot be used to fasten insolvency liability on the promoter.

A bench of Justice Sanjay Kumar and Justice Alok Aradhe said that for an obligation to qualify as a guarantee under Section 126 of the Act, there must be a clear and unambiguous promise by the surety to repay the borrower's debt if the borrower defaults.

“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 court said.

The dispute goes back to July 2011, when Electrosteel Limited took a Rs 500 crore loan from SREI Infrastructure Finance Limited. The sanction letter did not require any personal or corporate guarantee from Electrosteel Castings Limited, the promoter of Electrosteel Limited.

Instead, Electrosteel Castings executed a Deed of Undertaking, agreeing to arrange for infusion of funds if required so that the borrower could comply with financial covenants. There was no clause requiring the promoter to repay the loan or discharge the borrower's debt.

In 2017, Electrosteel Limited entered the corporate insolvency resolution process. A resolution plan submitted by Vedanta was approved, under which the company's debt was settled partly through cash payment and partly through conversion into equity.

After the plan was implemented, SREI issued a no dues certificate to Electrosteel Limited. Later, however, SREI claimed it had received fewer shares than it was entitled to and assigned what it described as a residual debt to UV Asset Reconstruction Company Limited.

UV ARC then approached the National Company Law Tribunal, Cuttack, filing an application under Section 7 of the Insolvency and Bankruptcy Code against Electrosteel Castings. It claimed that the promoter was a corporate guarantor and that the residual debt could still be recovered from it.

The NCLT was not persuaded by this and rejected the plea. It held that Electrosteel Castings was not a guarantor and that the debt stood extinguished under the resolution plan. That view was upheld by the National Company Law Appellate Tribunal, leading to the appeal before the Supreme Court.

Before the Supreme Court, Electrosteel Castings argued that its Deed of Undertaking merely required it to arrange infusion of funds and did not contain any promise to repay the borrower's debt. UV ARC, on the other hand, argued that the clause operated like a “see to it” guarantee and that the promoter was obliged to step in if the borrower failed to meet its obligations.

The court rejected that argument after closely examining Clause 2.2 of the Deed of Undertaking.It noted that the clause only required funds to be infused into the borrower so that it could comply with financial covenants, and did not contemplate payment to the lender or discharge of the borrower's debt.

“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,” the bench said.

It added, “A mere covenant to ensure financial discipline or infusion of funds does not satisfy the statutory requirements of Section 126 of the Act."

On the issue of extinguishment of debt, the Supreme Court clarified that approval of the resolution plan of Electrosteel Limited did not automatically wipe out the entire debt so as to bar claims against third parties.

The court noted that a resolution plan can preserve rights against guarantors or security providers. However, since Electrosteel Castings was found not to be a guarantor at all, the question of enforcing any residual debt against it did not arise.

Upholding the concurrent findings of the NCLT and the NCLAT on the nature of the undertaking, the Supreme Court dismissed the appeal.

Case Title: UV Asset Reconstruction Company Limited v. Electrosteel Castings Limited

Citation: 2026 LLBiz SC 3

Case Number: Civil Appeal No. 9701 of 2024

For Appellant: Advocate Rohan Batra

For Respondent: Advocate Vikas Mehta