2025 (9) TMI 411 - AT - IBC

Tribunal rules contractual cap limits guaranteed principal only; guarantor remains liable for default interest beyond Rs.25 crore

NCLAT (PB) allowed the appeal, holding the adjudicating authority erred in construing Clause 33 as capping the guarantor's entire liability at Rs.25 ... Capping the limit of the entire liability of the guarantor including default interest for delayed discharge of guarantee obligations - failure to appreciate that the Corporate Guarantee also contained a specific clause which provided for liability on the part of the UEL to pay default interest - overall quantum of liability of the guarantor in terms of the Contract for Guarantee was only Rs. 25 Cr. inclusive of both principal guarantee amount as well as the default interest payable by the guarantor on the delay in the discharge of the guarantee obligations or not - HELD THAT:- The Adjudicating Authority has endeavoured to decide and determine whether the Guarantor under the deed of guarantee was liable only to the extent of the cap of Rs. 25 Cr. inspite of the deed of guarantee stipulating payment of default interest in the event of failure by the Guarantor to discharge the guarantee obligations. Relying on the judgment of this Tribunal in Shitanshu Bipin Vora Vs Shree Hari Yarns Pvt. Ltd. [2025 (4) TMI 1071 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI - LB] the Adjudicating Authority has observed that it did not have the power to interpret the terms of the Corporate Guarantee and that a plain and simple meaning based on the express terms of the Guarantee Contract is required to be applied in the present case. The Adjudicating Authority has come to the finding that if the simple and plain meaning is to be followed, since both the parties have consciously executed the deed of guarantee by inserting Clause 33 which starts with a non-obstante provision, the Guarantor would be liable only to the extent of Rs. 25 Cr cap laid down in Clause 33. Reliance has also been placed upon judgment of the Hon’ble Supreme Court in Syndicate Bank Vs Channaveerappa Beleri and Ors. [2006 (4) TMI 540 - SUPREME COURT] wherein it has been laid down that the liability of a Guarantor will depend purely on the terms of contract of guarantee. Further it is found that it has not been controverted by either Respondent No.1 or the RP that the Appellant while submitting their claim in Form-C had claimed the guarantee liability amount to be Rs. 25 Cr. as liability of UIL to the Appellant Bank. In other words, the Appellant had crystallised the guarantee liability at Rs. 25 Cr. on the invocation of guarantee in terms of Clause 3(a) of the Deed of Guarantee. We do not find any flaw in the quantum of guarantee liability claimed by the Appellant bank qua the liability of the principal borrower. This amount was in accordance with Clause 3(a) of the Guarantee document which amount the Appellant Bank had opted as security amount. Furthermore, this guarantee liability amount of Rs. 25 Cr. claimed by the Appellant Bank was pretty much in conformity with the cap laid down under Clause 33. Payment of default interest by Respondent No.1 cannot be mixed up with the discharge of liability of the principal borrower. Discharge of the liability of principal borrower is a different obligation from the obligation of the guarantor to pay interest on failure on their part to discharge the obligations of the guarantee on invocation. Since the liability of Rs. 25 Cr. had not been discharged by UEL within the cure period in terms of Clause 3(a), the Appellant Bank became entitled to charge default interest as provided by Clause 3. Thus, there are no infirmity on the part of the RP to have allowed this default interest liability to be added with guarantee liability in the claim filed by the Appellant bank. Hence, claim of default interest payment over and above Rs. 25 Cr. has been misconstrued by the Adjudicating Authority as a breach of Clause 33. Clause 33 cannot be read to place an all pervasive limit of Rs. 25 cr. to cover both the liability of the principal borrower guaranteed by UEL and the liability of UEL towards default interest payment for delay in discharge of guarantee obligations on their part. In effect, Appellant Bank’s submission of claim of Rs.67,98,65,048/- was not in violation of Clause 33 of the guarantee document. The directions of the Adjudicating Authority contained in the impugned order that Clause 33 of the Guarantee Agreement dated 10.08.2016 caps the entire liability of Respondent No. 1 to Rs. 25 crore cannot be sustained - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a contractual cap in a guarantee deed commencing with a non-obstante clause (stating 'Notwithstanding anything hereinabove stated our liability under this guarantee shall not exceed Rs. 250 Million') limits the guarantor's total liability to that cap inclusive of default interest payable by the guarantor for delay in discharging the guarantee obligation. 2. Whether Clause 3 (obligating the guarantor to pay the guaranteed amount on demand) and the immediately following clause providing for default interest on the guarantor's failure to pay within the cure period are in conflict with the liability cap clause, or whether the clauses must be read harmoniously so that both operate independently. 3. The proper approach to interpret commercial guarantee documents with overlapping provisions: role of plain meaning, the effect of a non-obstante clause, and the application of commercial/common-sense principles in construing remedies for late payment. ISSUE-WISE DETAILED ANALYSIS Issue 1: Does the non-obstante liability cap absorb default interest payable by the guarantor? Legal framework: Contractual interpretation principles; role of a non-obstante clause as an overriding provision; obligations of guarantor under guarantee deed; separate concept of guarantor's own default interest liability triggered by the guarantor's failure to pay within cure period; relevant provisions of the Indian Contract Act as to nature of suretyship (contract to perform third party's obligation). Precedent treatment: The Adjudicating Authority relied on a Tribunal precedent holding that plain and simple meaning of an express contractual cap must be applied. Parties also invoked higher court authorities for the principle that a guarantor's liability is governed by the terms of the contract. Other authorities (as relied upon by the successful party) support harmonious construction and recognition of independent interest remedies. Interpretation and reasoning: The Court examined the textual scheme: Clause 3(a) creates an obligation to pay the guaranteed amount on demand (crystallised here at the capped principal figure), and the immediately following provision creates an independent obligation to pay default interest where the guarantor fails to discharge that obligation within the cure period. Clause 33's 'liability' cap language and the separate terminal condition relating to the borrower's outstanding indebtedness were read contextually. The Court found no textual indication that Clause 33 was intended to include the separately articulated default-interest obligation; notably Clause 33's second sentence does not refer to interest in computing threshold or termination. The Court held that the non-obstante clause operates to resolve conflicts, but it cannot be mechanically applied to obliterate an independent remedy where no direct conflict exists. Ratio vs. Obiter: Ratio - A non-obstante clause limiting 'liability' to a monetary cap does not automatically subsume a separately expressed obligation to pay default interest arising from the guarantor's own failure to perform, where the two clauses operate in distinct spheres and there is no textual conflict. Obiter - comments on comparative foreign authority and commercial policy considerations supporting business efficacy. Conclusion: Clause 33 does not cap or extinguish the guarantor's separate default-interest obligation under Clause 3; the guarantor remains liable for default interest in addition to the capped guaranteed principal amount. Issue 2: Whether Clauses 3 and 33 are in conflict and whether harmonious construction is required Legal framework: Principles of contractual interpretation - read clauses harmoniously to avoid rendering any clause otiose; where multiple constructions are possible, adopt the construction that gives effect to all clauses; non-obstante clause has overriding effect only where there is a conflict. Precedent treatment: The Court referred to authorities stating that contractual terms should be read to effectuate commercial intent and to avoid constructions that nullify clauses. The Adjudicating Authority's reliance on a plain-meaning approach that gave Clause 33 absolute primacy was examined and contrasted with the principle of harmonious construction. Interpretation and reasoning: The Court analysed the sequencing and wording of Clauses 3(a), 3 (default interest), and 33. It found that Clause 3 imposes two distinct obligations - (i) pay the guaranteed sum (crystallised at Rs. 25 Cr), and (ii) pay default interest accruing from the guarantor's failure to pay within the cure period. Clause 33's use of 'liability' and the separate termination threshold suggest it was addressing the guarantor's exposure tied to the borrower's indebtedness rather than the guarantor's independent interest liability. Because no direct textual inconsistency was established, the non-obstante clause could not be invoked to nullify Clause 3's interest remedy. The Court stressed that a non-obstante clause is meant to prevail only in case of conflict and cannot be applied where clauses are capable of independent operation. Ratio vs. Obiter: Ratio - Where contractual clauses are capable of independent operation and no direct conflict is shown, they must be read harmoniously; non-obstante language cannot be used to defeat an independent remedy expressly provided elsewhere in the contract. Obiter - observations on when a non-obstante clause would properly override other provisions (i.e., demonstrable conflict). Conclusion: Clauses 3 and 33 are not in conflict on the facts; they should be harmoniously read so that the principal guarantee is capped but default interest remains payable as an independent obligation of the guarantor. Issue 3: Role of commercial common sense and the Adjudicating Authority's duty in contractual interpretation Legal framework: Commercial contract interpretation principle - give effect to business efficacy and commercial common sense; adjudicative duty to interpret documents holistically rather than mechanically. Precedent treatment: The Court noted authorities admonishing courts and tribunals to prefer constructions that accord with commercial realities and to avoid interpretations that produce absurd or commercially untenable results, including denial of routine remedies such as default interest in lending transactions. Interpretation and reasoning: The Court found the Adjudicating Authority had mechanically applied the non-obstante clause without confronting whether a conflict with Clause 3 existed. That approach produced an outcome where a standard and commercially essential remedy (default interest for delayed payment) would be foreclosed despite an express contractual provision. The Court held that interpreting a commercial guarantee to deprive a lender of interest for delayed payment, absent clear contractual language to that effect, would frustrate business efficacy and the parties' evident intent in inserting the interest provision. Ratio vs. Obiter: Ratio - Commercial documents should be interpreted to preserve commercially sensible remedies and to give operative effect to express clauses; tribunals must assess inter-clause conflicts rather than apply non-obstante phrases mechanically. Obiter - policy observations about disincentives to timely payment if default interest were treated as subsumed by a cap absent clear wording. Conclusion: The Tribunal must apply harmonious construction and commercial common sense; the Adjudicating Authority erred by failing to do so and by treating the non-obstante clause as automatically overriding the separate default-interest provision. Overall Conclusion The guarantor's principal liability under the guarantee deed is capped by the liability clause at the stated figure, but that cap does not extend to or extinguish the guarantor's independent obligation to pay default interest arising from failure to discharge the guarantee within the cure period. The impugned decision treating the non-obstante clause as an all-encompassing limit was unsustainable and has been set aside. No order as to costs.