Promoter’s Fund-Infusion Undertaking Is Not a Corporate Guarantee Under Contract Law: Supreme Court

The Supreme Court has held that a promoter’s undertaking to infuse funds into a borrower company to meet financial covenants does not amount to a contract of corporate guarantee under Section 126 of the Indian Contract Act, 1872. The bench of Justice Sanjay Kumar and Justice Alok Aradhe has observed that approval of a resolution plan does not automatically discharge third-party guarantors or security providers, unless the plan expressly provides so. However, since ECL was found not to be a guarantor at all, the question of enforcing residual debt against it did not arise. The principal question before the Court was whether Clause 2.2 of a Deed of Undertaking, executed by ECL in favour of SREI Infrastructure Finance Limited (later assigned to UV ARC), constituted a corporate guarantee for loans availed by Electrosteel Steels Limited (ESL). A connected issue was whether approval of ESL’s resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC) extinguished all claims against ECL as a promoter or security provider. ESL had availed financial assistance of ₹500 crore from SREI in 2011. While the sanction letter did not require any personal or corporate guarantee from ECL, the promoter executed a Deed of Undertaking agreeing to arrange infusion of funds if ESL failed to meet stipulated financial covenants. Subsequently, ESL entered corporate insolvency resolution proceedings (CIRP), culminating in approval of a resolution plan submitted by Vedanta. Under the plan, part of the debt was paid upfront, while the balance “unsustainable debt” was converted into equity. SREI issued a “no dues certificate” post-implementation, but later assigned what it claimed to be residual debt to UV ARC. UV ARC initiated proceedings under Section 7 of the IBC against ECL, alleging that the Deed of Undertaking was, in substance, a guarantee and that liabilities survived the resolution plan. The Supreme Court undertook a detailed examination of Section 126 of the Contract Act and reiterated that a contract of guarantee requires a clear and unambiguous promise by the surety to discharge the liability of the principal debtor upon default. Interpreting Clause 2.2 of the Deed of Undertaking, the Court held that the clause merely obligated ECL to arrange infusion of funds into ESL to ensure compliance with financial covenants. There was no promise to pay the lender directly or to discharge ESL’s debt in the event of default. Such an arrangement may reflect promoter support or financial discipline, but it does not satisfy the statutory ingredients of a guarantee. The Court rejected the argument that the clause amounted to a “see to it” guarantee, noting that Indian law does not recognise arrangements that merely facilitate performance by the borrower as guarantees under Section 126. Contemporaneous Documents Reinforced Findings The Court placed reliance on contemporaneous records, including the original sanction letter, which did not envisage any corporate or personal guarantee. The information memorandum in ESL’s CIRP, which reflected no guarantee by ECL. The assignment agreement and financial statements, which did not disclose any guarantor liability. These documents, according to the Court, clearly demonstrated that the parties never intended to create a contract of guarantee. The Court also analysed the structure of the resolution plan and noted that financial creditors had taken a substantial haircut on the unsustainable debt, part of which was converted into equity and later diluted through capital restructuring. Crucially, the resolution plan expressly preserved creditors’ rights against third parties only where valid guarantees or securities existed. Upholding the judgments of the NCLT and NCLAT, the Supreme Court dismissed both appeals, holding that a promoter’s undertaking to infuse funds to meet financial covenants is not a guarantee. Electrosteel Castings Limited cannot be treated as a guarantor for the loans advanced to ESL. There was no surviving enforceable financial debt against ECL under the IBC. Case Details Case Title: UV Asset Reconstruction Company Limited Versus Electrosteel Castings Limited Case No.: Civil Appeal No. 9701 of 2024 Date: 06/01/2026 Click Here To Read Order Read More: Aluminium Mushroom Racks Are Taxable ‘Structures’, Not Customs Duty Free Parts of Agricultural Machinery: Supreme Court

Promoter’s Fund-Infusion Undertaking Is Not a Corporate Guarantee Under Contract Law: Supreme Court

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