In a significant ruling clarifying the limits of corporate guarantees under insolvency law, the Supreme Court of India has dismissed an appeal filed by UV Asset Reconstruction Company Limited, holding that an undertaking to infuse funds cannot be treated as a guarantee under law.
The verdict came in a long-running dispute involving insolvency proceedings linked to Electrosteel Steels Limited, and brings finality to claims raised against its former promoter, Electrosteel Castings Limited.
Background of the Case
The dispute traces back to 2011, when Electrosteel Steels Limited availed a ₹500 crore loan from SREI Infrastructure Finance Limited. At the time, Electrosteel Castings Limited, as the promoter, executed a Deed of Undertaking agreeing to arrange funds if the borrower failed to meet certain financial covenants.
Years later, after insolvency proceedings against Electrosteel Steels Limited were resolved through a court-approved resolution plan, UV Asset Reconstruction Company - which had acquired SREI’s rights - claimed that a residual debt survived and sought to initiate insolvency proceedings against Electrosteel Castings Limited as a corporate guarantor.
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The National Company Law Tribunal (NCLT) rejected this claim in 2022. That decision was upheld by the National Company Law Appellate Tribunal (NCLAT) in January 2024, prompting the appeal before the Supreme Court.
At the heart of the case was a narrow but crucial question:
Did Clause 2.2 of the 2011 Deed of Undertaking amount to a “contract of guarantee” under Section 126 of the Indian Contract Act?
If answered in the affirmative, Electrosteel Castings Limited could be treated as a guarantor and dragged into insolvency proceedings. If not, the claim would collapse.
Court’s Observations
The Bench carefully dissected the language of the undertaking. It noted that the clause merely required the promoter to arrange infusion of funds into the borrower so that financial covenants could be met.
“The clause does not contain any promise to discharge the debt of the borrower,” the Court observed, adding that a valid guarantee must involve a clear and direct obligation to pay the creditor upon default.
The judges emphasized that insolvency law cannot stretch contractual language beyond what parties expressly agreed. An undertaking to support a company financially, the Court said, is not the same as stepping into the shoes of a guarantor.
The Bench further pointed out that contemporaneous documents -including the original sanction letter, the information memorandum in insolvency proceedings, and the assignment deed - consistently showed no corporate guarantee by Electrosteel Castings Limited.
UV ARC relied heavily on a ₹38 crore payment made by Electrosteel Castings Limited in 2017, arguing that it reflected acknowledgment of a guarantee obligation.
The Court rejected this argument outright.
It recorded that the payment was made voluntarily in the capacity of a promoter and not pursuant to any contractual guarantee. Such a payment, the judges clarified, cannot retrospectively create a guarantee where none exists in law. UV Asset Reconstruction Company…
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Final Decision
After examining the undertaking, the contractual framework, and insolvency records, the Supreme Court agreed with the concurrent findings of the NCLT and NCLAT.
The Bench concluded that Clause 2.2 of the Deed of Undertaking does not constitute a contract of guarantee, and therefore Electrosteel Castings Limited cannot be treated as a guarantor for the loan availed by Electrosteel Steels Limited.
Accordingly, the appeal filed by UV Asset Reconstruction Company Limited was dismissed, with no order as to costs.
Case Title: UV Asset Reconstruction Co. Ltd. v. Electrosteel Castings Ltd.
Case No.: Civil Appeal No. 9701 of 2024
Case Type: Insolvency & Bankruptcy Appeal
Decision Date: 6 January 2026
