S.126 Indian Contract Act | Promoter’s Fund-Infusion Undertaking Not A Guarantee: Supreme Court
Kiran Raj
The Supreme Court Division Bench of Justice Sanjay Kumar and Justice Alok Aradhe dismissed the appeals and upheld the tribunal’s view that a promoter’s undertaking to arrange infusion of funds into a borrower to meet financial covenants is not, by itself, a contract of guarantee under Section 126 of the Indian Contract Act, 1872. The dispute arose from a lender’s assignee seeking to treat such an undertaking, and related third-party security, as enforceable against the former promoter after the borrower’s insolvency resolution. The Court also clarified that approval of a resolution plan under the Insolvency and Bankruptcy Code, 2016 does not automatically wipe out claims tied to unsustainable debt against third-party guarantors or security providers, unless the plan expressly provides for such extinguishment.
The dispute arose from financial assistance of INR 500 crores extended by a lender to a corporate borrower pursuant to a sanction letter dated 26.07.2011. The sanction letter identified specific securities but did not stipulate any personal or corporate guarantee from the borrower’s promoter. However, the promoter executed a Deed of Undertaking dated 27.07.2011, agreeing to arrange infusion of funds into the borrower to enable compliance with stipulated financial covenants.
Subsequently, supplementary agreements were executed, and an equitable mortgage was created by the promoter over its immovable property to secure repayment of the borrower’s dues. In 2017, insolvency proceedings were initiated against the borrower, culminating in approval of a resolution plan providing for upfront cash payment and conversion of the remaining debt into equity shares. Upon implementation of the plan, the lender issued a no-dues certificate to the borrower.
Thereafter, the lender assigned the alleged residual debt to an asset reconstruction company, which initiated proceedings under Section 7 of the Insolvency and Bankruptcy Code against the promoter, asserting that the undertaking amounted to a corporate guarantee. The adjudicating authority rejected the application, holding that no guarantee existed and that the debt stood extinguished. The appellate tribunal affirmed this finding, leading to the present appeals before the Supreme Court.
The Court examined the statutory definition of a contract of guarantee and recorded that “Section 126 of the Act defines a ‘Contract of Guarantee’, as a contract to perform promise, or discharge the liability, of a third person in case of his default.” It noted that the essential ingredients include “existence of principal debt, default by the principal debtor and a promise by the surety to discharge the liability of the principal debtor upon such default.”
On construction of the Deed of Undertaking, the Court reproduced Clause 2.2 and observed that “the aforesaid Clause obligates [the promoter] to arrange for infusion of funds into [the borrower], so as to enable the borrower to comply with the stipulated Financial Covenants.” It clarified that “for an obligation to be construed as a guarantee… there must be a direct and unambiguous obligation of the surety to discharge the obligation of the principal debtor to the creditor.”
The Court expressly recorded that “the clause neither records an undertaking to discharge the debt owed to the creditor nor does it contemplate payment to the lender in the event of the default.” It further stated that “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.”
Addressing reliance on a “see to it” guarantee, the Court observed that “a ‘See to it’ guarantee does not include an obligation to enable the principal debtor to perform its own obligation” and such an arrangement “would not be a guarantee under Section 126 of the Act.”
On contemporaneous documentation, the Court recorded that “the sanction letter dated 26.07.2011 does not contemplate any personal or corporate guarantee,” and noted that insolvency records, the assignment deed, and audited financial statements did not reflect any guarantee obligation. With respect to payments made by the promoter, it stated that “payment of an amount of INR 38 crores… was not made on account of any contractual obligation” and did not give rise to a contract of guarantee.
Regarding the second appeal, the Court examined the resolution plan and observed that “the Resolution Plan did not provide the financial creditors… with the full value of unsustainable debt.” Referring to the plan terms, it recorded that “rights against any third party… in relation to any portion of Unsustainable Debt secured or guaranteed by third parties, will not be extinguished.”
The Court further stated that “approval of the Resolution Plan does not ipso facto discharge a security provider of her or his liabilities under the contract of security.”
The Court recorded that “For the aforementioned reasons, the issue involved in the appeal is answered in the negative. The approval of the Resolution Plan of ESL does not result in extinguishment of entire debt, so as to bar any claim against the ECL as a security provider/third-party surety.”
“In view of preceding analysis, we do not find any infirmity in the impugned judgment of the NCLAT. The appeal is accordingly dismissed. There shall be no order as to costs.”
Case Title: UV Asset Reconstruction Company Limited v. Electrosteel Castings Limited; Electrosteel Castings Limited v. UV Asset Reconstruction Company Limited
Neutral Citation: 2026 INSC 14
Case Numbers: Civil Appeal No. 9701 of 2024; Civil Appeal No. 12367 of 2025
Bench: Justice Sanjay Kumar, Justice Alok Aradhe
