Third-party mortgage deed and undertaking: whether it qualifies as a s.126 Contract Act guarantee for s.7 CIRP; appeal dismissed

The dominant issue was whether a deed of undertaking and mortgage created by a third party constituted a "contract of guarantee" under s.126 of the Contract Act so as to permit initiation of CIRP under s.7 IBC against that third party. The SC held that a guarantee requires a specific, unambiguous undertaking by the surety to discharge the principal debtor's liability upon default, and pleadings must be read holistically; an earlier statement describing a limited "guarantee" confined to mortgaged property did not establish a contractual guarantee. Authorities on admissions under s.58 Evidence Act were inapplicable. Consequently, the findings of NCLT/NCLAT that no guarantee existed and the third party was not a guarantor were affirmed, and the appeal was dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether Clause 2.2 of the Deed of Undertaking, by which the obligor agreed to "arrange for the infusion" of funds into the borrower to enable compliance with financial covenants, constituted a contract of guarantee within Section 126 of the Indian Contract Act, 1872, so as to treat the obligor as a guarantor of the borrower's financial facility.

(ii) Whether the creditor's reliance on alleged admissions in pleadings and on a promoter's payment could establish or evidence a guarantee obligation when the underlying undertaking did not create a direct promise to discharge the borrower's liability to the creditor.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Construction of Clause 2.2-whether it is a "contract of guarantee" under Section 126

Legal framework (as discussed by the Court): The Court applied Section 126 of the Indian Contract Act, 1872, which defines a contract of guarantee as a contract "to perform the promise, or discharge the liability, of a third person in case of his default." The Court identified essential ingredients: (a) existence of principal debt, (b) default by the principal debtor, and (c) a promise by the surety to discharge the principal debtor's liability upon such default. The Court further held that to constitute a guarantee there must be a specific undertaking or unambiguous affirmation to discharge the third person's liability in case of default.

Interpretation and reasoning: The Court read Clause 2.2 as obligating the obligor to "arrange for the infusion" of funds into the borrower so that the borrower could comply with financial covenants. The Court held that Section 126 requires a direct and unambiguous obligation of the surety to the creditor to perform the promise or discharge the liability of the principal debtor. Clause 2.2 did not record an undertaking to discharge the borrower's debt to the creditor, nor did it contemplate payment to the lender upon default. Instead, it was a promise to facilitate the borrower's compliance with covenants through infusion of funds, which the Court held is not equivalent to a promise to discharge the borrower's liability to the creditor. The Court treated such covenant as insufficient to satisfy Section 126, characterising it as a measure to ensure financial discipline rather than a statutory guarantee.

Conclusions: Clause 2.2 did not constitute a contract of guarantee under Section 126; consequently, the obligor could not be treated as a guarantor for the borrower's facility, and no financial debt could be asserted against it on that basis.

Issue (ii): Effect of contemporaneous documents, "see to it" characterisation, alleged admissions, and voluntary payment

Interpretation and reasoning: The Court relied on contemporaneous documentation to reinforce intention: the sanction terms did not contemplate any personal or corporate guarantee; the information memorandum did not reflect a guarantee; the assignment documentation recorded "Nil" against guarantor/co-borrower details; and the borrower's audited financial statements did not reflect a guarantee obligation. These materials supported the inference that the parties did not intend to create a guarantee.

The Court addressed the argument that the undertaking was a "see to it" guarantee, holding that Section 126 mandates direct "perform a promise" or "discharge the liability," implying direct performance/discharge. The Court distinguished an obligation to enable the principal debtor to perform (by arranging infusion of funds) from an obligation to discharge the debtor's liability to the creditor, and held that such enabling arrangement is not a guarantee under Section 126.

On the alleged payment made by the obligor, the Court held that the payment was not made pursuant to any contractual guarantee obligation but in the obligor's capacity as promoter, and such payment could not create a guarantee where none existed in the undertaking.

On reliance upon pleadings as admissions, the Court held pleadings must be read as a whole and not selectively. The statement relied upon arose in the context of proceedings concerning mortgage security and described a limited position tied to mortgaged property with no personal recourse; it did not amount to a clear admission establishing a Section 126 guarantee arising from Clause 2.2. The Court therefore rejected the attempt to treat those pleadings as determinative proof of a guarantee obligation.

Conclusions: Neither the "see to it" characterisation, nor the payment by the promoter, nor the selective reliance on pleadings displaced the construction of Clause 2.2 as a non-guarantee; the Court affirmed the concurrent finding that no guarantee existed and dismissed the appeal.

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