“See-To-It” Obligation Is Not A Guarantee Under Indian Law: Supreme Court Clarifies Scope Of Section 126 ICA In IBC Disputes

"An obligation to enable the principal debtor to perform its own obligation cannot be equated with a statutory guarantee under Section 126 of the Indian Contract Act.", On January 6, 2026, the Supreme Court in UV Asset Reconstruction Company Ltd. vs. Electrosteel Castings Ltd., dismissed a Civil Appeal under Section 62 of the Insolvency and Bankruptcy Code, 2016, upholding concurrent findings of the NCLT and NCLAT that a clause in a Deed of Undertaking did not constitute a contract of guarantee under Section 126 of the Indian Contract Act, 1872. The Court further held that the approval of a resolution plan does not extinguish debt claims against third-party sureties unless expressly provided in the plan.

The ruling, delivered by a Bench comprising Justice Sanjay Kumar and Justice Alok Aradhe, decisively addressed two crucial legal issues: first, the legal character of Clause 2.2 of the Deed of Undertaking executed by Electrosteel Castings Limited (ECL); and second, whether the approval of the corporate resolution plan for Electrosteel Steels Limited (ESL) extinguished rights of the financial creditors against third-party obligors like ECL.

Clause 2.2 Does Not Create Any Direct Obligation Towards Creditor

At the heart of the matter was Clause 2.2 of a 2011 Deed of Undertaking by ECL—erstwhile promoter of ESL—which stated that ECL would “arrange for the infusion of such amount of fund into the borrower [ESL] such that the borrower is in a position to comply with the abovementioned financial covenants.”

Rejecting the contention of the appellant UV Asset Reconstruction Company (assignee of SREI Infrastructure Finance Ltd.), the Court ruled that this clause did not fulfill the essential ingredients of a contract of guarantee under Section 126 of the Indian Contract Act.

Quoting its own analysis, the Court emphasized: “For an obligation to be construed as a guarantee under Section 126 of the Act, there must be a direct and unambiguous obligation of the surety to discharge the obligation of the principal debtor to the creditor.”

The judgment explained that Clause 2.2 imposed an internal obligation between promoter (ECL) and borrower (ESL) but made no commitment to the creditor (SREI) to discharge debt in case of default.

The Court noted: “An 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.”

Further distinguishing English common law concepts from Indian contract law, the Bench held that the “see to it” type of guarantee, relied upon by the appellant, is not recognized under Section 126 ICA:

“A ‘See to it’ guarantee does not include an obligation to enable the principal debtor to perform its own obligation. Such an arrangement would not be a guarantee under Section 126 of the Act.”

The Court added that ECL's earlier payment of ₹38 crores to SREI did not establish any contractual guarantee:

“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.”

Resolution Plan Does Not Extinguish Rights Against Third-Party Promoters: Clause 3.2(ix) Preserves Claims

In a significant ruling on the second issue, the Supreme Court rejected the appellant’s plea that the approval and implementation of ESL’s resolution plan had the effect of extinguishing any debt claims against ECL, including as a third-party surety.

Analyzing the approved resolution plan dated 17.04.2018, the Court noted that while ESL’s ₹13,395 crore debt was partly converted into equity (unsustainable debt), the plan did not eliminate creditors’ rights against third parties. In fact, the plan explicitly preserved those rights.

Clause 3.2(ix) of the Resolution Plan stated: “All rights/remedies of the creditors shall stand permanently extinguished except any rights against any third party (including the existing promoter) in relation to any portion of unsustainable debt secured or guaranteed by third parties.”

The Court further remarked: “The Resolution Plan unequivocally provides that rights against any third party, including a security provider/existing promoter in relation to any portion of unsustainable debt, will not be extinguished.”

Thus, any residual liability or claim that UV Asset may have against ECL (in a different factual matrix) would not be barred merely due to the resolution plan, provided that ECL was a guarantor or security provider under a valid instrument. However, in the present case, ECL could not be treated as such.

The Court also clarified that reduction in share value or conversion of debt into equity, followed by capital restructuring of ESL, did not imply full recovery of the original debt:

“The financial creditors were to receive shares worth only ₹152.38 crores in lieu of unsustainable debt of ₹7619.24 crores.”

The appellant’s argument that there was no haircut suffered by SREI or that equity conversion led to full discharge was categorically rejected. The Court termed it a “significant haircut.”

ECL Not A Guarantor, And Resolution Plan Does Not Bar Third-Party Claims Per Se

Summing up, the Supreme Court made two clear determinations: First, Clause 2.2 of the Deed of Undertaking is not a contract of guarantee under Section 126 of the Indian Contract Act, 1872. No personal or corporate guarantee was ever contemplated or created between ECL and SREI.

Second, the approval of ESL’s Resolution Plan did not extinguish the rights of financial creditors against third parties like promoters or security providers, unless such extinguishment is explicitly stated.

“Approval of the Resolution Plan of ESL does not result in extinguishment of entire debt, so as to bar any claim against ECL as a security provider/third-party surety.”

The appeal was accordingly dismissed with no order as to costs.

Date of Decision: January 6, 2026