Latest JudgementIndian Contract Act, 1872

UV Asset Reconstruction Company Limited v. Electrosteel Castings Limited, 2026

The Court provided a strict interpretation of Section 126, emphasizing the requirement of a clear surety obligation.

Supreme Court of India·13 January 2026

Court

Supreme Court of India

Date of Decision

13 January 2026

Judges

Justice Sanjay Kumar & Justice Alok Aradhe

Citation

Acts / Provisions

Section 126, Indian Contract Act, 1872 Section 7, Insolvency and Bankruptcy Code, 2016

Facts of the Case

Electrosteel Limited (ESL) availed financial assistance of ₹500 crores from SREI Infrastructure Finance Limited in 2011.
Electrosteel Castings Limited (ECL), being the promoter of ESL, executed a Deed of Undertaking agreeing to arrange infusion of funds to enable ESL to meet financial covenants.
The Loan Agreement contained a clause requiring such infusion by ECL.
ESL underwent Corporate Insolvency Resolution Process (CIRP) in 2017–18.
A Resolution Plan was approved and implemented, and SREI issued a no-due certificate.
Subsequently, SREI claimed residual debt and assigned its rights to UV Asset Reconstruction Company Ltd.
The appellant filed a petition under Section 7 IBC against ECL before NCLT, Cuttack, claiming ECL to be a guarantor.
The NCLT dismissed the petition holding that ECL was not a guarantor.
The NCLAT affirmed the finding.
Both parties approached the Supreme Court.

Whether the undertaking given by ECL to arrange infusion of funds amounted to a contract of guarantee under Section 126 of the Indian Contract Act, 1872?
Whether ECL could be treated as a guarantor for the financial facilities availed by ESL?
Whether conversion of ESL’s debt into equity under the Resolution Plan resulted in extinguishment of ECL’s liability?
Whether approval of a Resolution Plan under the IBC automatically extinguishes claims against third-party security providers?

The Supreme Court dismissed the appeal filed by UV Asset Reconstruction Company Ltd.
The Court held that Clause 2.2 of the Deed of Undertaking did not constitute a contract of guarantee.
The Court affirmed that ECL was not a guarantor for the loan availed by ESL.
In the connected appeal, the Court held that approval of a Resolution Plan does not automatically extinguish unsustainable debt against third parties, unless expressly provided.
The appeal filed by ECL challenging NCLAT’s findings was also dismissed.

An obligation to arrange infusion of funds does not amount to a guarantee under Section 126 of the Contract Act.
A contract of guarantee requires a clear and direct promise to discharge the debt of the principal debtor.
A “see to it” arrangement enabling compliance with financial covenants is not a guarantee.
Resolution Plan approval under the IBC does not extinguish third-party liability unless specifically stated.

The Court provided a strict interpretation of Section 126, emphasizing the requirement of a clear surety obligation.
It distinguished between enabling performance and discharging liability, holding only the latter to be a guarantee.
The judgment clarifies the limited scope of “see to it” guarantees in Indian law.
The Court harmonized contract law principles with the IBC framework.
The ruling prevents automatic extinguishment of third-party security through resolution plans.
The decision reinforces commercial certainty by protecting lenders while preventing over-extension of guarantor liability.