UV ASSET RECONSTRUCTION COMPANY LIMITED v. ELECTROSTEEL CASTINGS LIMITED
Contract of Guarantee: Supreme Court Clarifies Requirements under Section 126 of the Indian Contract Act, Holding Undertaking to Infuse Funds Does Not Constitute a Guarantee.
Court: Supreme Court of India
Citation: 2026 INSC 14
Decision Date: 06-01-2026
List of Laws
Insolvency and Bankruptcy Code, 2016; Section 7 of the Insolvency and Bankruptcy Code, 2016; Section 62 of the Insolvency and Bankruptcy Code, 2016; Section 126 of the Indian Contract Act, 1872; The Indian Evidence Act, 1872
- Facts: UV Asset Reconstruction Company Limited (UVARCL) appealed against Electrosteel Castings Limited (ECL), challenging the NCLAT's decision that Clause 2.2 of a Deed of Undertaking did not constitute a contract of guarantee, and that ECL could not be treated as a guarantor for financial facilities availed by Electrosteel Steels Limited (ESL). ESL had availed financial assistance from SREI Infrastructure Finance Limited (SREI), later assigned to UVARCL. ECL, as ESL's promoter, furnished an undertaking to arrange for fund infusion into ESL. After ESL's insolvency resolution, UVARCL claimed ECL was a guarantor for the residual debt.
- Procedural Posture: The appeal reached the Supreme Court after the NCLT rejected UVARCL's application under Section 7 of the Insolvency and Bankruptcy Code, 2016, and the NCLAT affirmed this rejection, holding that ECL was not a guarantor and that the resolution plan extinguished the debt of ESL.
- Issue: The primary issue was whether Clause 2.2 of the Deed of Undertaking constituted a contract of guarantee under Section 126 of the Indian Contract Act, 1872, thereby making ECL a guarantor for ESL's financial facilities, and whether the approval of ESL's resolution plan extinguished the entire debt, barring claims against ECL.
- Holding: The Supreme Court dismissed the appeal, concurring with the NCLT and NCLAT's findings that Clause 2.2 of the Deed of Undertaking did not constitute a contract of guarantee, and ECL could not be treated as a guarantor. The Court also held that the resolution plan extinguished the debt only for ESL, the corporate debtor, but not necessarily for third parties unless expressly provided in the plan.
- Reasoning: The Court reasoned that for an obligation to be a guarantee under Section 126 of the Indian Contract Act, it must be a direct and unambiguous undertaking by the surety to discharge the principal debtor's obligation to the creditor. Clause 2.2 only obligated ECL to arrange for fund infusion into ESL to comply with financial covenants, not to directly discharge ESL's debt to SREI. The Court emphasized that a 'See to it' guarantee in English Common Law requires the guarantor to ensure the principal debtor performs its obligation, not merely enable the debtor to perform. The sanction letter also did not contemplate any personal or corporate guarantee from ECL. The Court also noted that pleadings must be read as a whole, and ECL's admission of a limited guarantee related only to mortgaged property, not a personal guarantee.
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