NCLT Mumbai Rules, Guarantor's Liability Cannot Exceed Contractual Cap By Adding Interest On Principal Amount For Delayed Payment
Pranav B Prem
The National Company Law Tribunal (NCLT), Mumbai Bench, has held that a guarantor’s liability cannot be extended beyond the cap specified in the contract of guarantee by including interest on delayed payments. The judgment reiterates that where the terms of the guarantee contain a non-obstante clause clearly capping liability, such a cap must be enforced in its literal sense. The ruling came from a Bench comprising Justice Sushil Mahadeorao Kochey (Judicial Member) and Charanjeet Singh Gulati (Technical Member), which allowed an application challenging the admission of a claim exceeding the capped amount.
Background
Ushdev Engitech Limited (UEL), the corporate debtor, had executed a Corporate Guarantee dated 10.08.2016 in favour of ICICI Bank Ltd. to secure the repayment of loan facilities availed by its parent company, Ushdev International Limited (UIL). Clause 33 of the guarantee expressly capped UEL’s liability at ₹25 crores. The clause began with a non-obstante expression—“Notwithstanding anything hereinabove stated”—intended to override all other provisions in the guarantee.
Following default by UIL, ICICI Bank invoked the guarantee through a demand notice dated 16.10.2017. UEL failed to discharge the guaranteed amount. Later, during the Corporate Insolvency Resolution Process (CIRP) of UEL, ICICI Bank submitted a revised claim for ₹68.02 crores, comprising ₹25 crores as the principal amount and approximately ₹43 crores as default interest. The Resolution Professional admitted ₹67.98 crores of this claim.
An application was filed before the Tribunal by a suspended director of UEL challenging the admission of this amount, arguing that the guarantor’s liability was limited to ₹25 crores as per Clause 33.
Applicant’s Arguments
The applicant stressed that Clause 33 clearly and unambiguously imposed a ₹25 crore cap on UEL’s liability, and being a non-obstante clause, it prevailed over any conflicting provisions in the guarantee. It was submitted that interpreting Clause 33 otherwise would defeat the parties’ express contractual intention and render the cap meaningless.
Reliance was placed on several precedents, including:
Syndicate Bank v. Channaveerappa Beleri [2006 11 SC 506], where the Supreme Court held that the liability of a guarantor must be determined based solely on the terms of the contract;
State of Maharashtra v. M.N. Kaul [AIR 1967 SC 1634], to underscore that enforceability of a guarantee depends on the agreed terms;
Section 128 of the Indian Contract Act, which allows limitation of the surety’s liability by contract.
The applicant contended that the bank’s own invocation notice, limited to ₹25 crores, confirmed its understanding of Clause 33, and that subsequent inflation of the claim was inconsistent and unjustified.
ICICI Bank’s Response
ICICI Bank argued that Clause 33 should not be read in isolation and must be harmonized with Clause 3 of the same guarantee, which provides that default interest would be payable if the guarantor fails to pay on demand. According to the bank, Clause 3 created a separate, stand-alone obligation to pay interest that survived and operated independently of the liability cap in Clause 33.
The bank contended that including default interest within the cap would negate commercial common sense and act as a disincentive for prompt payment. It relied on the English judgment in Topalsson GmbH v. Rolls Royce Motor Cars Ltd [ (2023) EWHC 1765 (TCC) ], where it was held that a cap on liability does not restrict the obligation to pay default interest unless expressly stated. Furthermore, ICICI Bank emphasized that under Section 5(8)(i) of the Insolvency and Bankruptcy Code, 2016, a financial debt includes interest disbursed for the time value of money, and thus default interest constituted a recoverable financial debt.
Resolution Professional’s Position
The Resolution Professional defended the admission of ICICI Bank’s claim, stating that a detailed verification had been conducted and legal advice was taken before concluding that interest beyond ₹25 crores was admissible under Clause 3. The RP relied on the principle that a financial creditor is entitled to both principal and interest under the IBC.
Tribunal’s Findings
The Tribunal carefully examined Clause 3 and Clause 33 of the Corporate Guarantee. While Clause 3 provided for payment of penal interest in the event of default by the guarantor, Clause 33, being a non-obstante clause, stated: “Notwithstanding anything hereinabove stated our liability under this guarantee shall not exceed Rs. 250 Million.”
The Tribunal noted that this clause, inserted deliberately, superseded all other clauses in the deed and clearly capped the guarantor’s liability. It held that the interpretation proposed by ICICI Bank would effectively nullify the non-obstante clause and result in rewriting the contract—a course the Tribunal was not empowered to take.
The Tribunal agreed with the applicant’s contention that the language used in Topalsson—which relied on the phrase “subject to”—was materially different from the present case, where the cap was framed using “notwithstanding”, thereby giving it overriding authority.
It also noted that while Clause 3 imposed penal interest for delayed payment, Clause 33 unambiguously limited all liabilities, including those arising under Clause 3, to ₹25 crores. Interpreting otherwise would not only go against the plain meaning but would also contradict established legal principles concerning contractual interpretation.
The Tribunal emphasized: “Any other interpretation to say that there would be uncertainty of payment in the penal interest is not charged and that it would not make a business commercial common sense would be interpreting the document as against the agreed terms of the contract between the parties and it would amount to inserting something which would not found place in the expressed terms of contract.”
In conclusion, the NCLT held that Clause 33 prevailed, and ICICI Bank's claim could not exceed ₹25 crores. It further held that courts and tribunals are bound to apply the plain and simple meaning of contractual terms, especially when a non-obstante clause is involved.
Final Order
The Tribunal allowed the application and held that the guarantor’s liability under the Deed of Guarantee is limited to ₹25 crores as expressly capped under Clause 33, notwithstanding any provisions for interest or otherwise in other clauses.
Appearance
For the Applicant: Adv. Nikhil Rajan (PH)
For the Petitioner: Adv. Nausher Kohli (PH)
For the Respondent: Adv. Prakshal Jain (R-1) (PH)
For the Respondent: Adv. Saurabh Bachawat (R-2) (PH)
Cause Title: Seeta Neeraj Shah V. ICICI Bank Ltd.
Case No: IA/4194/2024 IN C.P. (I.B) No. 119/MB/2021
Coram: Sh. Sushil Mahadeorao Kochey [Hon’ble Member (Judicial)], Sh. Charanjeet Singh Gulati [Hon’ble Member (Technical)]
[Read/Download order]
