Pranav B Prem

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), has ruled that a guarantor’s liability cannot be limited merely to the capped amount specified in the deed of guarantee concerning the principal borrower’s liability. The Tribunal held that the guarantor’s liability to pay default interest upon failure to discharge its obligations operates independently and cannot be restricted by the liability cap applicable to the principal borrower.

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The appeal was filed by ICICI Bank Ltd. under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC), challenging an order dated April 29, 2025, passed by the National Company Law Tribunal (NCLT), Mumbai Bench (Court-V), in IA No. 4194 of 2024 in C.P. (IB) No. 119/MB/2021, which had capped the guarantor’s liability under the deed of guarantee at ₹25 crore.

Background of the Case:

Ushdev International Limited (UIL) had availed credit facilities from ICICI Bank through a Credit Arrangement Letter dated December 24, 2014. To secure these facilities, Ushdev Engitech Limited (UEL) executed a Corporate Guarantee on August 10, 2016, guaranteeing repayment of UIL’s dues. Upon default by UIL, the bank invoked the guarantee on October 16, 2017. Subsequently, ICICI Bank initiated insolvency proceedings against UEL, which were admitted on April 26, 2023, and upheld by the NCLAT and the High Court. Following admission of CIRP, ICICI Bank submitted its Form-C claim to the Resolution Professional (RP), initially claiming ₹25 crore as the guaranteed amount and seeking verification of default interest. After due diligence, the RP admitted the revised claim at ₹67.98 crore, which included ₹25 crore as principal guarantee amount and ₹42.98 crore as default interest.

Subsequently, Seeta Neeraj Shah, the ex-director of UEL, filed an application before the NCLT contending that the liability of the guarantor must be capped at ₹25 crore, as prescribed under Clause 33 of the Corporate Guarantee. The Adjudicating Authority accepted this plea and restricted the liability accordingly, prompting ICICI Bank to approach the Appellate Tribunal.

Appellant’s Submissions:

Senior Advocate Krishnendu Datta, appearing for ICICI Bank, argued that the NCLT had misinterpreted the terms of the guarantee deed by ignoring Clause 3, which imposes liability on the guarantor to pay default interest if the guaranteed amount is not paid within the stipulated cure period. He contended that Clause 33 applies only to the liability arising from the principal borrower’s debt, whereas Clause 3 creates an independent obligation on the guarantor. It was submitted that a commercial contract like a guarantee must be interpreted to give effect to business common sense. The bank argued that restricting the guarantor’s liability to ₹25 crore even for delayed payments would undermine the contractual intent and discourage timely repayment of dues. The Appellant also relied on the English Court of Appeal judgment in Topalsson GmBH v. Rolls Royce Motors Car Ltd., which held that default interest provisions cannot be negated by liability caps.

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Respondent’s Submissions:

Senior Advocate Ramji Srinivasan, representing Respondent No. 1, argued that Clause 33 of the guarantee deed begins with a “notwithstanding” clause, expressly limiting the guarantor’s liability to ₹25 crore. He contended that this clause overrides all other provisions, including Clause 3, and reflects the parties’ conscious decision to cap total liability. The Respondent further relied on Section 128 of the Indian Contract Act, 1872, which provides that a surety’s liability is co-extensive with that of the principal debtor unless otherwise stated in the contract — here, the contract explicitly limited liability to ₹25 crore.

Tribunal’s Findings:

The NCLAT examined the relevant provisions of the guarantee deed, particularly Clauses 3(a), 3, and 33, and found that while Clause 3(a) covers the guarantor’s obligation to pay amounts due from the principal borrower, Clause 3 imposes a distinct liability to pay default interest if the guarantor fails to honour the guarantee within the cure period. The Tribunal observed that both clauses operate in “different and independent spheres,” and therefore, the cap under Clause 33 cannot nullify the obligation under Clause 3. The Bench held that Clause 33 restricts only the principal borrower’s guaranteed liability, not the guarantor’s own liability to pay interest for delayed discharge. It noted: “Clause 3 deals with the guarantor’s default, while Clause 33 imposes a cap on the principal borrower’s liability. Both clauses operate in separate spheres. The cap under Clause 33 cannot restrict the guarantor’s liability to pay default interest which falls beyond its scope.”

The Tribunal also agreed with the Topalsson principle that a clause providing for default interest constitutes an independent contractual remedy that cannot be negated by a liability limitation clause. The NCLAT emphasized that the presence of a “non-obstante” clause in Clause 33 does not automatically override other clauses unless there is a direct conflict. In this case, since Clause 3 and Clause 33 address different obligations, they must be read harmoniously.

The Bench further noted that the NCLT erred in mechanically applying the “notwithstanding” clause without examining the interplay between Clauses 3 and 33. It held that the Adjudicating Authority’s narrow interpretation would render Clause 3 otiose, contrary to established principles of contract interpretation requiring that all provisions be given effect.

Allowing the appeal, the NCLAT held that the liability cap of ₹25 crore under Clause 33 cannot restrict the guarantor’s separate obligation to pay default interest arising under Clause 3. It concluded that the Resolution Professional was correct in admitting ICICI Bank’s claim of ₹67.98 crore, including the default interest, and that the NCLT erred in capping the liability. In its concluding remarks, the Tribunal observed that commercial contracts must be construed in accordance with business common sense and that denying the right to recover default interest would undermine the integrity of financial guarantees.

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Accordingly, the impugned order dated April 29, 2025, was set aside, and ICICI Bank’s appeal was allowed, reaffirming that a guarantor’s liability for default interest is independent of and not restricted by the cap applicable to the principal borrower’s liability.

Appearance

For Appellant: Mr. Krishnendu Dutta, Sr. Advocate with Mr. Prakshal Jain, Mr. Arnav Doshi, Mr. Siddharth Ranade and Mr. Shankh Sengupta, Advocates.

For Respondent: Mr. Ramji Srinivasan, Sr. Advocate with Mr. Kumar Anurag Singh, Mr. Zain A. Khan, Mr. Vijay Mathur, Mohd. Abran Khan, Ms. Shefali Munde and Mr. Arjun Bhatia, Advocates for R-1. Ms. Pooja Mahajan, Mr. Savar Mahajan and Mr. Srivastava Beerapalli, Advocates for RP. Mr. Tirth Nayak and Mr. Palash S. Singhai, Advocates for SRA.

Cause Title: ICICI Bank Ltd. Versus Seeta Neeraj Shah and Anr.

Case No: Company Appeal (AT) (Insolvency) No. 731 of 2025

Coram: Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member)