Legal Review and Analysis of UV Asset Reconstruction Co Ltd vs Electrosteel Castings Ltd 2026 INSC 14
Case Synopsis
Demarcating Debt Facilitation from Guarantee & The Enduring Shield of Third-Party Security
Case: UV Asset Reconstruction Co. Ltd. vs. Electrosteel Castings Ltd. (2026 INSC 14) is a pivotal ruling that clarifies two critical aspects of commercial and insolvency law. First, it firmly distinguishes a promoter’s undertaking to arrange funds for a borrower from a legally enforceable guarantee to repay the lender, emphasizing the need for clear contractual intent. Second, it reinforces the principle that a corporate debtor’s rescue via an insolvency resolution plan does not automatically provide a sanctuary to third parties who have secured the debt; their liability persists if the plan consciously preserves the creditor’s rights against them.
1. Heading of the Judgment
Interpretation of a “Deed of Undertaking” as a contract of guarantee under the Indian Contract Act, 1872, and the impact of a Corporate Insolvency Resolution Plan on the liability of a third-party security provider under the Insolvency and Bankruptcy Code, 2016.
Judgment Name: UV Asset Reconstruction Company Limited vs. Electrosteel Castings Limited
Citation: 2026 INSC 14, Civil Appeal No. 9701 of 2024 & Civil Appeal No. 12367 of 2025
Judges: Justice Alok Aradhe and Justice Sanjay Kumar
Date of Judgment: January 06, 2026
2. Relevant Laws and Sections
Insolvency and Bankruptcy Code, 2016 (IBC):
Section 7: Initiation of Corporate Insolvency Resolution Process by financial creditor.
Section 31: Approval of resolution plan.
Section 62: Appeal to the Supreme Court.Indian Contract Act, 1872:
Section 126: Definition of a “Contract of Guarantee” – a contract to perform the promise or discharge the liability of a third person in case of his default.
3. Basic Judgment Details
Facts of the Case (Consolidated from Both Appeals)
Parties:
Appellant: UV Asset Reconstruction Company Limited (ARC) – Assignee of rights from SREI Infrastructure Finance Limited (Original Financial Creditor).
Respondent: Electrosteel Castings Limited (ECL) – Erstwhile Promoter of the Corporate Debtor.
Corporate Debtor: Electrosteel Steels Limited (ESL).
Background
ESL availed financial assistance of INR 500 Crores from SREI under a Sanction Letter dated 26.07.2011.
The initial security was a demand promissory note and post-dated cheques. No personal or corporate guarantee from ECL was stipulated.
ECL, as a promoter, executed a Deed of Undertaking, Warranty, and Indemnity dated 27.07.2011. Clause 2.2 obligated ECL to “arrange for the infusion of such amount of funds into the Borrower (ESL)” to enable ESL to comply with its financial covenants if it breached them.
Subsequently, ECL also created an equitable mortgage on its property to secure the debt.
ESL underwent Corporate Insolvency Resolution Process (CIRP). A resolution plan by Vedanta was approved. SREI received part payment in cash and the remainder via conversion of debt into equity shares in ESL.
After the plan's implementation, SREI assigned its alleged residual rights to UV ARC.
UV ARC filed an application under Section 7 of IBC against ECL, claiming ECL was a guarantor for ESL’s debt.
Issues Before the Supreme Court
In Civil Appeal No. 9701 of 2024 (UV ARC vs. ECL):
Whether Clause 2.2 of the Deed of Undertaking constitutes a “contract of guarantee” under Section 126 of the Indian Contract Act, 1872, making ECL a guarantor?
In Civil Appeal No. 12367 of 2025 (ECL vs. UV ARC)
Whether the approval and implementation of the resolution plan for ESL resulted in the extinguishment of the entire debt, thereby barring any claim against ECL as a security provider/third party?
Ratio Decidendi (Court’s Reasoning)
A. On the Nature of the Deed of Undertaking (First Appeal)
The Supreme Court upheld the concurrent findings of the NCLT and NCLAT, holding that Clause 2.2 did not create a contract of guarantee. The reasoning was as follows:
Essential Ingredients of a Guarantee: Under Section 126, a guarantee requires: (a) a principal debt, (b) default by the principal debtor, and (c) a promise by the surety to discharge the liability of the principal debtor to the creditor upon such default.
Analysis of Clause 2.2: The clause only obligated ECL to arrange for infusion of funds into ESL to help ESL meet its covenants. It did not contain a direct, unambiguous promise by ECL to SREI to pay ESL’s debt upon ESL’s default. The promise was to the borrower (ESL) for facilitation, not to the creditor (SREI) for discharge of liability.
Contemporaneous Documents: The original Sanction Letter did not list a guarantee from ECL as security. The Information Memorandum during CIRP and the Assignment Deed also did not reflect ECL as a guarantor.
Rejection of “See to it” Guarantee Concept: The Court rejected the appellant’s reliance on the English law concept of a “see to it” guarantee, clarifying that Indian law under Section 126 requires a promise to discharge the debtor's liability, not merely an obligation to ensure the debtor performs.
Admissions in Pleadings: The Court held that pleadings must be read as a whole. ECL’s earlier statement about a “guarantee” was in the specific context of the mortgage security being limited to the mortgaged property without personal recourse. This did not amount to an admission of a personal guarantee for the debt.
B. On the Effect of the Resolution Plan on Third-Party Liability (Second Appeal)
The Supreme Court dismissed ECL’s appeal, holding that the approval of the resolution plan for ESL did not automatically extinguish the debt against a third-party security provider like ECL. The reasoning was:
Substance of the Resolution Plan: The Court analyzed the financial terms. The “unsustainable debt” of INR 7619.24 crores was converted into equity. However, a subsequent reduction in the face value of these shares meant financial creditors, including SREI/ARC, ultimately received shares worth only INR 152.38 crores. This constituted a substantial haircut.
Explicit Preservation of Rights: Clause 3.2(ix) of the approved resolution plan explicitly stated that rights against any third party (including the existing promoter/security provider) in relation to any portion of the unsustainable debt secured or guaranteed by them “will not be extinguished.”
Settled Legal Principle: The Court reaffirmed that the approval of a resolution plan for the corporate debtor does not ipso facto discharge the liabilities of sureties/security providers under their independent contracts. Their liability persists unless the plan explicitly extinguishes it.
Conclusion on this Issue: Since the plan specifically preserved rights against third parties like ECL, and a significant haircut was suffered by the creditor, the debt was not fully extinguished vis-à-vis ECL. ECL’s liability as a security provider (via mortgage) survived for the unsustainable debt portion.
4. Core Principles of the Judgment
I. The Distinct Line Between an “Undertaking to Arrange Funds” and a “Contract of Guarantee”
Key Test: The Supreme Court crystallized the test for a guarantee under Section 126 of the Indian Contract Act. The surety’s promise must be to the creditor to discharge the monetary or performance liability of the principal debtor upon the debtor’s default.
Facilitation vs. Discharge: A promise by a third party (like a promoter) to the borrower to infuse funds or arrange resources to help the borrower meet its obligations is a facilitation covenant. It does not translate into a guarantee to the creditor to pay the debt if the borrower fails. The intent of the parties, gathered from the primary loan agreement and contemporaneous documents, is paramount.
Clarity in Drafting: The judgment underscores the importance of precise language in financial documents. Terms like “guarantee” or “surety” must be used intentionally and defined clearly to create a legally enforceable guarantee.
II. Survival of Third-Party Liability Post-Resolution Plan Approval
No Automatic Discharge: The approval of a resolution plan under IBC Section 31 discharges the corporate debtor from its liabilities as per the plan. However, it does not automatically release sureties, guarantors, or other third-party security providers.
Plan Language is Decisive: The rights of creditors against such third parties are governed by the specific terms of the approved resolution plan. If the plan explicitly preserves these rights (as in Clause 3.2(ix) here), creditors can continue to pursue recovery from them.
Haircut Reinforces Continuity: The fact that financial creditors took a haircut under the plan strengthens the argument that the underlying debt obligation has not been satisfied in full, thereby keeping alive the recourse against third parties who had secured that debt.
5. Final Outcome
Civil Appeal No. 9701 of 2024 (UV ARC vs. ECL): Dismissed. The Supreme Court held ECL was not a guarantor under the Deed of Undertaking.
Civil Appeal No. 12367 of 2025 (ECL vs. UV ARC): Dismissed. The Supreme Court held that the approved resolution plan for ESL did not extinguish the debt as against ECL, a third-party security provider, and rights against it were preserved.
Net Result: UV ARC’s application under Section 7 of IBC against ECL remained dismissed. ECL’s liability as a security provider (mortgagor) for the unsustainable debt portion survived, but its liability was not in the capacity of a guarantor.
6. MCQs Based on the Judgment
Question 1: According to the Supreme Court in UV ARC vs. Electrosteel Castings Ltd., which of the following is an essential ingredient for a contract to be considered a "guarantee" under Section 126 of the Indian Contract Act, 1872?
A. A promise by a third party to provide business advice to the borrower.
B. A promise by a third party to the creditor to discharge the liability of the principal debtor upon the debtor's default.
C. A promise by a third party to the borrower to infuse funds to help it meet its operational expenses.
D. An oral assurance by a promoter to the lender during negotiations.
Question 2: In the context of the Insolvency and Bankruptcy Code, 2016, the Supreme Court ruled that the approval of a resolution plan for a corporate debtor?
A. Automatically and irrevocably discharges all sureties and third-party security providers from their liabilities.
B. Has no effect on the debts owed to operational creditors.
C. Does not ipso facto discharge the liability of third-party security providers unless the resolution plan explicitly extinguishes such rights.
D. Invalidates all prior securities created by the corporate debtor.