Summary
The Supreme Court held that a promoter's undertaking to arrange infusion of funds into the borrower so that the borrower could comply with financial covenants is not a contract of guarantee under Section 126 of the Contract Act, and upheld the rejection of the assignee creditor's Section 7 IBC application against the promoter.
Issues
- Whether Clause 2.2 of the Deed of Undertaking, obliging the promoter (ECL) to arrange infusion of funds into the borrower (ESL) to enable compliance with financial covenants, is a contract of guarantee within Section 126 of the Contract Act, 1872.
- Whether the promoter's payment of INR 38 crores and its pleadings in other proceedings established its status as a guarantor.
Provisions considered
- Section 126, Indian Contract Act, 1872The Court identified the essentials of a guarantee as a principal debt, default by the principal debtor and a promise by the surety to discharge the debtor's liability upon default, requiring a direct and unambiguous obligation to the creditor; Clause 2.2, being a promise to facilitate the borrower's compliance with covenants rather than to pay the creditor, did not meet that test. (¶¶ 17, 20, 22, 25)
- Section 7, Insolvency and Bankruptcy Code, 2016The appellant's application against ECL as an alleged corporate guarantor had been rejected by the NCLT and NCLAT; the Court affirmed that rejection since ECL was not a guarantor. (¶¶ 1, 9, 10, 25)
- Section 58, Indian Evidence Act, 1872The decisions relied on for the binding effect of admissions were explained as authorities that clear and true admissions are the best proof of facts in the context of Section 58, and held inapplicable because the pleadings, read as a whole, admitted only a guarantee limited to mortgaged property. (¶ 24)
Held
- A guarantee is a promise to answer for another's debt or performance on that person's default; there must be a specific and unambiguous undertaking to discharge the third person's liability. A guarantee, as a mercantile contract, is construed to give effect to the parties' real intention as expressed in writing, not by technical rules. (¶¶ 17, 18)
- Clause 2.2 neither records an undertaking to discharge the debt owed to the creditor nor contemplates payment to the lender on default; it is a promise to the borrower to facilitate covenant compliance. A covenant to ensure financial discipline or infusion of funds does not satisfy Section 126. (¶¶ 19, 20)
- Contemporaneous documents confirmed no guarantee was intended: the sanction letter identified the securities without any personal or corporate guarantee, the CIRP information memorandum showed none, the assignment agreement recorded 'Nil' against guarantor details, and the borrower's audited statements showed no guarantee obligation. (¶ 21)
- Section 126 requires the guarantor to perform the promise or discharge the liability directly. An English-law 'see to it' guarantee obliges the guarantor to ensure the debtor performs, but an obligation merely to enable the debtor to perform is not a guarantee under Section 126. (¶ 22)
- The promoter's payment of INR 38 crores was made in its capacity as promoter and not under any contractual obligation, and did not by itself create a guarantee. (¶ 23)
- Pleadings must be read as a whole; the promoter's statement in mortgage-enforcement proceedings referred to a guarantee limited to the mortgaged property without personal recourse, so it did not estop the promoter from denying a guarantee of the facility. (¶ 24)
Result
Appeal dismissed; concurrent findings of NCLT and NCLAT that ECL was not a guarantor affirmed; no order as to costs.