Guarantor's Liability Cannot Exceed Contractual Cap By Adding Interest On Principal Amount For Delayed Payment: NCLT Mumbai

The National Company Law Tribunal (NCLT) Mumbai bench of Justice Sh. Sushil Mahadeorao Kochey (Judicial Member) and Sh. Charanjeet Singh Gulati (Technical Member) has held that the guarantor's liability cannot exceed the limit specified in the contract of guarantee. When the corporate debtor defaults, the guarantor is bound only to the extent of the capped amount that is Rs. 25 crore in the present case, as consciously agreed upon by the parties. This cap cannot be exceeded by adding interest on the principal amount for delayed payment. Brief Facts: Ushdev Engitech Limited (UEL) (Corporate Debtor) executed a Corporate Guarantee dated 10.08.2016 in favour of ICICI Bank to secure the repayment of certain loan facilities availed by its parent company Ushdev International Limited (UIL). Clause 33 of the Corporate Guarantee provides the liability of Ushdev Engitech Limited under the Corporate Guarantee capped to Rs. 25 Crores. Pursuant to defaults committed by Ushdev International Limited (UIL), ICICI Bank invoked the Corporate Guarantee on 16.10.2017 demanding payment of Rs. 25 Crores from UEL under the Corporate Guarantee i.e. Invocation Notice was issued. However, UEL failed to discharge its debt within the stipulated timeline. On 02.07.2024, Resolution Professional (RP) admitted an amount of Rs. 67,98,65,048/- as the claim of ICICI Bank (admitted amount). Therefore, the present Application is filed contending that the liability of the Guarantor under the Deed of Guarantee is capped Rs. 25 Crores only and, therefore, the admission of claim by RP is not proper. Contentions: The Applicant submitted that a perusal of Clause 33 of the Corporate Guarantee unequivocally limits the Guarantor's liability to Rs. 25 Crores. The literal interpretation of the Clause restricts and limits the Guarantor's liability to maximum of Rs. 25 Crores. It was further submitted that the surety's liability is generally co-extensive with that of the Principal Debtor unless the contract states otherwise. Here, Clause 33 explicitly limits the liability, as allowed under Section 128 of the Contract Act. Therefore, any interpretation must respect this contractual cap and cannot override the agreed limitation. The Respondent submitted that the liability in Clause 33 cannot exclude the Corporate Debtor's obligation to pay default interest, as Clause 33 must be read with Clause 3, which explicitly provides for such interest. The parties agreed separately in Clause 3 on the conditions and calculation of default interest, which cannot be negated by the cap in Clause 33. It was further submitted that the purpose of adding a capping clause is to promote certainty in the Guarantee. If interest for non-payment was included within this cap, then the potential effect of any late payment would be uncertain, because it would never be clear for how long the monies would remain unpaid, and therefore, what interest may become due, and when or if the limit of the cap may be reached. The Respondent No. 2 submitted that the Guarantee given by the Corporate Debtor to ICICI Bank for payment of amounts due from the Borrower subject to a cap of Rs. 25 crores is covered under Clause 5(8)(i) of the Insolvency and Bankruptcy Code, 2016 (Code). ICICI Bank is entitled to charge interest under Clause 3, in case the Guarantor fails to pay the guaranteed amount within time. Observations: The Tribunal noted that the Supreme Court in Syndicate Bank Vs. Channaveerappa Beleri & Ors. held that a guarantor's liability arises solely from the terms of the guarantee contract. A continuing guarantee differs from an ordinary guarantee in scope and duration. Liability may depend on whether the contract requires a demand by the creditor. The guarantor's obligation can be limited to a specific sum rather than matching the principal debtor's liability. The Apex Court further held that the liability may arise at the same time as that of the principal debtor or at a different point in time. Even if a claim becomes time-barred against the principal debtor, it may still be enforceable against the guarantor. These variations depend entirely on what the parties have agreed upon in the contract. The Tribunal further observed that the Supreme Court in 'State of Maharashtra Vs. M.N Kaul held that whether a Guarantee is enforceable or not depends on the terms under which the Guarantor bound himself. Based on the above, it said that the Deed of Guarantee is a contract between the Applicant and Respondent No. 1. While Clauses 3 and 3(a) provide for invocation of the guarantee and impose an obligation on the Guarantor to pay the amount with penal interest upon the Borrower's default, Clause 33, introduced with a non-obstante clause, prevails. It further added that it clearly states that despite the earlier clauses, the Guarantor's liability is capped to the limit specified ...

Guarantor's Liability Cannot Exceed Contractual Cap By Adding Interest On Principal Amount For Delayed Payment: NCLT Mumbai

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Guarantor's Liability Cannot Exceed Contractual Cap By Adding Interest On Principal Amount For Delayed Payment: NCLT Mumbai

Mohd Malik Chauhan

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