UV Asset Reconstruction Company Limited vs Electrosteel Castings Limited

Held: Clause 2.2 of Deed of Undertaking obligates ECL to arrange for infusion of funds into ESL, so as to enable the borrower to comply with the stipulated Financial Covenants – For an obligation to be construed as a guarantee u/s.126, there must be a direct and unambiguous obligation of the surety to discharge the obligation of the principal debtor to the creditor – 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 – Clause contains a promise, not to the creditor to pay the debt upon default, but to the borrower to facilitate compliance with Financial Covenants – 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 – Mere Covenant to ensure financial discipline or infusion of funds does not satisfy the statutory requirements of s.126 – Sanction letter does not contemplate any personal or corporate guarantee – It specifically identifies the securities for the facilities and does not require ECL to stand as surety – Fact that no guarantee was furnished by ECL also borne out from the documents – Thus, the parties never intended to create contract of guarantee – Payment of INR 38 crores by ECL to appellant not made on account of any contractual obligation – Said payment was made in its capacity as a promotor of ESL – Such payment by itself does not give rise to any contract of guarantee, particularly when there is no contractual obligation of guarantee in the Deed of Undertaking – Pleadings must be read as a whole and cannot be read selectively out of context or in isolation – Appellant had initiated an action to enforce the mortgage security created by ECL in favour of SREI – ECL in its pleadings stated that it has given a guarantee which is limited to the mortgaged property with no personal recourse to ECL – Concurrent findings of NCLT and NCLAT that Clause

2.2 of the Deed of Undertaking does not constitute a contract of guarantee and that ECL cannot be treated as guarantor for the financial facilities availed by ESL concurred with – No infirmity in the impugned judgment warranting interference. [Paras 19-25] Contract Act, 1872 – s.126 – ‘Contract of Guarantee’ – Essential ingredients of a guarantee – ‘See to it’ guarantee – Explained. [Paras 17, 18, 22]