SC Rules ‘See-to-It’ Promoter Clause Not A Guarantee Under Contract Act

New Delhi, Jan 14 (KNN) The Supreme Court ruled that a contractual clause requiring a promoter to arrange funds for a borrower to meet financial covenants does not constitute a guarantee under Section 126 of the Indian Contract Act, 1872. 

It also clarified that approval of a resolution plan under the IBC does not automatically discharge unsustainable debt of third-party security providers unless the plan explicitly states so.

‘See to It’ Guarantees Do Not Cover Third-Party Obligations
The Court, interpreting Section 126, held that for an obligation to qualify as a guarantee, the surety must have a direct and unequivocal duty to discharge the principal debtor’s obligation. 

It clarified that a ‘see-to-it’ guarantee under English law, where the guarantor ensures the debtor performs, is different from an obligation to enable or assist the debtor; the latter does not constitute a guarantee under Section 126.

Background: Electrosteel Limited Case
Electrosteel Limited (ESL) borrowed Rs 500 crore from SREI in 2011, with promoter ECL agreeing to arrange funds to meet financial covenants. During ESL’s 2017–18 CIRP, a resolution plan was approved. SREI later claimed residual debt and assigned its rights to UV Asset Reconstruction.

The NCLT and NCLAT held that ECL was not a guarantor and that the resolution plan extinguished only ESL’s liability, not third-party obligations.

Supreme Court Analysis
The Supreme Court noted that under Clause 2.2 of the Deed of Undertaking, ECL was only required to facilitate ESL’s compliance with financial covenants, not pay the lender. It observed that a covenant to ensure financial discipline or fund infusion does not meet Section 126’s definition of a guarantee.

Reviewing the sanction letter and other documents, the Court concluded there was no guarantee furnished by ECL. It upheld the findings of NCLT and NCLAT, holding that Clause 2.2 of the Deed of Undertaking did not constitute a contract of guarantee.

Accordingly, the Supreme Court dismissed the appeal, confirming that ECL could not be treated as a guarantor for ESL’s financial facilities.

(KNN Bureau)