Undertaking to Infuse Funds Is Not a “Contract of Guarantee” Under Section 126: Limits of “See-To-It” Obligations in IBC Section 7 Claims

1. Introduction

In UV Asset Reconstruction Company Limited v. Electrosteel Castings Limited (2026 INSC 14), the Supreme Court of India examined whether a promoter’s “Deed of Undertaking” to arrange infusion of funds into the borrower could be treated as a contract of guarantee under Section 126 of the Indian Contract Act, 1872, enabling the creditor/assignee to initiate insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 against the promoter entity.

The dispute arose from financing extended by SREI Infrastructure Finance Limited (SREI) to Electrosteel Steels Limited (ESL) (borrower). Electrosteel Castings Limited (ECL), ESL’s erstwhile promoter, executed a Deed of Undertaking, warranty, and indemnity dated 27.07.2011. SREI later assigned rights to UV Asset Reconstruction Company Limited (UV ARC).

The core issue was the interpretation of Clause 2.2 of the Deed of Undertaking: did it create a guarantee (making ECL a “guarantor/surety” for ESL’s debt), or did it merely impose a limited obligation to arrange infusion of funds to ensure compliance with financial covenants?

2. Summary of the Judgment

The Supreme Court dismissed UV ARC’s appeal and affirmed the concurrent findings of the NCLT and NCLAT that:

Clause 2.2 is not a contract of guarantee under Section 126 of the Contract Act.
The clause creates an obligation to arrange infusion of funds into the borrower to meet financial covenants, not an obligation to pay/discharge the borrower’s debt to the creditor on default.
English-law style “see to it” concepts do not expand Section 126 to cover obligations that merely enable the borrower to perform.
Alleged admissions and a payment of INR 38 crores did not convert the undertaking into a guarantee.

3. Analysis

3.1 Precedents Cited

(A) What constitutes a guarantee: debt, default, and promise to discharge

The Court anchored its understanding of guarantee in the statutory text of Section 126 and reinforced it with the classic description that a guarantee is “a promise to answer for the payment of some debt, or the performance of some duty, in case of failure of another,” citing Conley (Re), ex p Trustee v Barclays Bank Ltd. (1938) 2 All ER 127. This authority supported the Court’s emphasis on a direct promise to the creditor to discharge liability upon default.

(B) Construction of guarantees: intent and commercial interpretation

To interpret Clause 2.2, the Court invoked general principles on construing guarantees and mercantile documents: Raghunandan v. Kirtyanand, AIR 1932 PC 131, Eshelby v Federated European Bank Ltd. (1932) 1 KB 254, and Kamla Devi v. Thakhratmal Land, AIR 1964 SC 859. It also referenced Halsbury's Laws of England and Perrylease Ltd v Imecar AG, (1987) 2 All ER 378 to stress that courts construe commercial guarantees to reflect the parties’ real intention—yet without rewriting the instrument to create a surety obligation where none was undertaken.

(C) English “see to it” guarantee authorities: relied on by appellant, limited in Indian statutory setting

UV ARC relied on English authorities: Moschi v. Lep Air Services Ltd.: 2 WLR 1175, Associated British Courts v. Ferryways [2009] EWCA Civ. 189, and Shanghai Shipyard Co. Ltd. v. Reignwood International Investment (Group) Co. Ltd.: [2021] EWCA Civ. 1147, to argue that Clause 2.2 functioned as a “see to it” obligation triggered by default.

The Supreme Court, however, drew a critical boundary: even if English law recognises “see to it” formulations, Section 126 requires an undertaking to perform the promise or discharge the liability of the principal debtor. An obligation to enable the debtor (by funding it) to comply with covenants is not the same as an undertaking to pay the creditor or discharge the debt. Thus, English “see to it” reasoning could not be used to expand the statutory meaning under Indian law.

(D) High Court authorities cited by respondent: support for strict Section 126 requirements

The respondent relied on Indian decisions emphasising that not every comfort/undertaking is a guarantee: Yes Bank Limited v. Zee Entertainment Enterprises Limited and Ors, 2020 SCC OnLine Bom 11763, United Breweries (Holding) Ltd. v. Karnataka State Industrial Investment and Development Corporation Ltd. and Others, 2011 SCC OnLine Kar 4012, and Aditya Birla Finance Ltd. v. Siti Networks, 2023 SCC OnLine Del 1290. While the Supreme Court’s ratio primarily flows from Section 126 and the text of Clause 2.2, these authorities align with the approach that a guarantee requires a clear promise to the creditor to answer for the borrower’s default, not merely a promoter-support obligation.

(E) Admissions/estoppel authorities: distinguished as inapplicable

UV ARC invoked Mumbai International Airport Pvt. Ltd. v. Golden Chariot Airport and Ors. (2010) 10 SCC 422 and Nagindas Ramdas v. Dalpatram Ichharam and Ors. (1974) 1 SCC 242 to argue that ECL’s earlier pleadings amounted to binding admissions. The Court held these decisions concern clear admissions as proof under Section 58 of the Indian Evidence Act, 1872, and did not apply because (i) pleadings must be read as a whole, and (ii) the cited statement was in the context of mortgage enforcement and, at most, described a limited, property-linked exposure—not a personal/corporate guarantee satisfying Section 126.

3.2 Legal Reasoning

(A) Section 126 requires a direct surety promise to the creditor

The Court identified the essential ingredients of a guarantee: (a) principal debt, (b) default, and (c) a surety’s promise to discharge the liability upon default. It then tested Clause 2.2 against this structure.

(B) Text of Clause 2.2 creates borrower-support, not creditor-payment

Clause 2.2 provided that if the borrower could not comply with financial covenants, the obligors would “arrange for the infusion” of funds “into the Borrower” so that the borrower can comply. The Court treated this as decisive because:

It contains no undertaking to the lender to pay or discharge the borrower’s debt.
It contemplates funding the borrower, not payment to the creditor upon default.
It is directed to covenant compliance, not debt discharge.

Therefore, it is not a guarantee but a limited promoter-support covenant.

(C) Contemporaneous documents confirmed absence of a guarantee bargain

The Court reinforced interpretation through surrounding documentation indicating that the parties did not treat ECL as a guarantor:

The sanction letter dated 26.07.2011 identified securities (promissory note and post-dated cheques) and did not stipulate a corporate/personal guarantee.
The information memorandum in ESL’s CIRP did not record ECL’s guarantee/security for SREI’s facility.
In Schedule 1 to the Assignment Agreement, “details of the guarantor/co-borrower” were stated as “Nil”.
ESL’s audited financial statements did not reflect a guarantee obligation towards SREI.

(D) “See to it” concepts cannot bypass Section 126’s statutory content

The Court explained that even a “see to it” guarantee (as understood in English common law) is not a licence to treat every promoter-support mechanism as a guarantee. Crucially, a “see to it” obligation (as argued) did not translate into an obligation “to discharge the liability” under Section 126, because Clause 2.2 only required arranging funds so the borrower could comply—an enabling obligation rather than a discharging obligation.

(E) Payment of INR 38 crores did not create or prove a guarantee

The Court treated ECL’s payment as having been made in its capacity as a promoter and not pursuant to a contractual guarantee. Performance or voluntary payment cannot manufacture a guarantee absent a contractual undertaking meeting Section 126.

3.3 Impact

Sharper line between “support undertakings” and “guarantees”: Lenders and assignees cannot treat covenants to infuse funds, maintain ratios, or ensure covenant compliance as guarantees unless the instrument clearly promises to pay/discharge liability to the creditor upon default.
IBC Section 7 strategy: Financial creditors seeking to proceed against a third party must show a financial debt arising from a valid guarantee. This decision discourages Section 7 petitions founded on promoter undertakings that are not drafted as surety obligations.
Drafting consequences: If the commercial intent is a guarantee, documentation must (i) identify the surety, (ii) state the debt/obligations guaranteed, and (iii) clearly provide for payment/discharge to the creditor on default—rather than merely requiring internal funding of the borrower.
Assignment and due-certificates: The Court’s reliance on “Nil” guarantor entries and the “no due” context signals that post-CIRP or post-settlement restructuring/assignment claims will be tested against contemporaneous records to identify whether a guarantee relationship ever existed.

4. Complex Concepts Simplified

Contract of guarantee (Section 126): A three-party arrangement where the surety promises the creditor that if the borrower defaults, the surety will perform/pay (i.e., discharge the borrower’s liability).
Financial covenants: Contractual “health metrics” (like maintaining ratios/net worth) the borrower must meet. Breach may be a default, but a promise to help the borrower meet covenants is not automatically a promise to pay the lender.
“See to it” guarantee: A phrase sometimes used for obligations to ensure performance. The Court held that, under Indian law, a mere obligation to enable compliance (e.g., infuse funds) is not the same as an obligation to pay/discharge the borrower’s debt to the creditor.
CIRP and resolution plan: The insolvency process and settlement framework under the IBC. Although the NCLAT discussed whether a plan extinguishes third-party liability, the Supreme Court disposed of the appeal on the threshold finding that ECL was not a guarantor at all.
Admissions in pleadings: Statements can bind a party only if they are clear and must be read in context. Here, statements made in mortgage enforcement context did not amount to admitting a Section 126 guarantee.

5. Conclusion

The Supreme Court’s controlling principle is clear: an undertaking to arrange infusion of funds to help a borrower comply with financial covenants is not, without an explicit promise to the creditor to discharge the borrower’s liability, a “contract of guarantee” under Section 126. By insisting on a direct, unambiguous surety obligation—and by resisting attempts to import broader “see to it” notions—the Court strengthens certainty in distinguishing promoter-support instruments from enforceable guarantees, with immediate significance for IBC Section 7 proceedings against third parties.