India: NCLT - Commitments Under Put Option, Non-Disposal And Shortfall Undertaking Held As Financial Debt Under The IBC

Last Updated: 18 December 2018
Article by Trilegal .

An interesting question that recently arose before the NCLT was whether an undertaking of a Corporate Debtor under a put option, non-disposal and a shortfall undertaking could be considered a contract of guarantee and therefore a 'financial debt' under the IBC.

The National Company Law Tribunal, New Delhi (NCLT) on 6 December 2018, in the case of Union Bank of India v. Era Infra Engineering Limited, considered a put option, a non-disposal arrangement and a shortfall undertaking to be a contract of guarantee. Consequently, a default thereunder was held to be a financial debt under the Insolvency and Bankruptcy Code, 2016 (IBC). This is the first instance where any NCLT bench has ruled on the issue of default under a put option, or non-disposal arrangement or a shortfall undertaking.


In this matter, ICICI Bank, represented by Trilegal, had submitted four claims to the resolution professional (RP) of the corporate insolvency resolution process of Era Infra Engineering Limited (EIEL/Corporate Debtor), against four companies namely, Apex Buildsys Limited (ABL), Hyderabad Ring Road Project Private Limited (HRRPPL), Dehradun Highways Project Limited (DHPL) and Era Infrastructure (India) Limited (EIIL).

The RP admitted the claims against ABL and HRRPPL but rejected the claims against DHPL and EIIL which totalled to INR 700.75 crores.

The EIIL and DHPL claims were rejected by the RP on the following grounds:

(a) The EIIL claim was rejected on the ground that the put option (as exercised by ICICI Bank under the loan purchase agreement) and the non-disposal undertaking cannot be construed as a guarantee and consequently, the claim is not a financial debt in terms of the IBC; and

(b) The DHPL claim was rejected on the basis that the undertakings extended by EIEL only triggered in the event of a shortfall in payment to the lenders arising out of termination of the Concession Agreement executed between DHPL and National Highways Authority of India (NHAI). Consequently, the RP may not be able to arrive at the quantum of shortfall that the Corporate Debtor is obliged to meet. The RP further indicated that the said claim may be reconsidered once termination payments to DHPL (under the Concession Agreement) are indicated by NHAI.

In view of the rejection of claims amounting to INR 700.75 crores, ICICI Bank approached the NCLT by filing an application under section 60(5) of the IBC.


The NCLT held that the loan purchase agreement and the non-disposal undertaking relating to the EIIL claim and the promoter's undertaking relating to the DHPL claim, all tantamount to a contract of guarantee and therefore, are covered under the definition of 'financial debt' under the IBC. In reaching this conclusion, the NCLT examined the definition of a contract of guarantee under section 126 of the Contract Act, 1872 and found that the abovementioned agreements fulfil all the essential ingredients of a contract of guarantee.

Accordingly, the NCLT allowed the application filed by ICICI Bank and directed the RP to admit ICICI Bank's claims against credit facilities granted to EIIL and DHPL. As a consequential relief, the NCLT has also directed the RP to revise the list of financial creditors by including the aforesaid claims of ICICI Bank and grant proportionate voting share to ICICI Bank in the committee of creditors of the Corporate Debtor.


A large number of financing transactions carried out in India by banks and financial institutions rely on contractual commitments that are not expressly stated to be guarantees. These include loan purchase agreements, shortfall undertakings, payment undertakings, non-disposal undertakings and in some cases, a combination of such arrangements. The IBC uses the terms 'guarantee' and 'indemnity' in the definition of 'financial debt' and construing these terms narrowly would be detrimental to lenders who may have relied on other forms of contractual comfort.

The NCLT has, while construing the contractual commitments in question, gone into the intention of the parties as well as the purpose for which they were executed and recognised some of these arrangements to be akin to guarantees for the purpose of the IBC. Therefore, resolution professionals ought not to mechanically go by the nomenclature of a document (which forms the basis of a claim for financial debt) but must apply themselves to its underlying intent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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