Continuing Guarantees in Corporate Transactions: Legal Framework and Emerging Jurisprudence

Guarantees are essential in commercial transactions, providing creditors with assurance that obligations will be fulfilled even if the principal debtor defaults. In India, the law of guarantees is governed by the Indian Contract Act, 1872, which distinguishes between specific guarantees and continuing guarantees.

A specific guarantee relates to a single transaction, while a continuing guarantee extends to a series of transactions or obligations over time. Judicial interpretation has reinforced the binding nature of continuing guarantees, especially in corporate settings where directors, promoters, and companies themselves assume obligations to secure loans or other financial arrangements.

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Statutory Framework

The Indian Contract Act, 1872, provides a detailed legal framework for guarantees, including continuing guarantees, under Sections 126 to 139:

• Section 126 defines a contract of guarantee as a contract to perform the promise or discharge the liability of a third person in case of default.

• Section 128 provides that the liability of the surety is co‑extensive with that of the principal debtor, unless otherwise provided by the contract. This means the creditor can proceed directly against the guarantor without exhausting remedies against the debtor.

• Section 129 defines a continuing guarantee as one that extends to a series of transactions.

• Section 130 provides that a continuing guarantee may be revoked by notice to the creditor, except as to transactions already entered into.

• Sections 133-139 deal with discharge of surety, including variation of contract, release of principal debtor, or creditor’s conduct impairing surety’s rights.

Together, these provisions establish that unless expressly revoked, a continuing guarantee binds the surety for future transactions within its scope, and the guarantor’s liability is immediate and co‑extensive.

Liability of Guarantors in Corporate Transactions

One of the critical aspects of continuing guarantees in corporate contexts is the liability of guarantors. Courts have consistently held that guarantor obligations under continuing guarantees are robust and enduring:

1. Co‑extensive liability (Section 128):

The guarantor’s liability is equal to that of the principal debtor. The creditor can sue the guarantor directly without first proceeding against the debtor.

2. Continuing liability:

In the case of continuing guarantees, the guarantor remains liable for successive transactions until the guarantee is revoked. Resignation from directorship or a change in management does not automatically discharge liability.

3. Independent contract:

A guarantee is an independent contract. Even if the principal contract faces disputes, the guarantee remains enforceable unless specifically discharged under Sections 133–139.

4. Revocation:

A guarantor may revoke a continuing guarantee by notice under Section 130, but such revocation only applies prospectively. Transactions already entered into remain binding.

5. Discharge of surety:

A guarantor may be discharged if the creditor varies the terms of the contract without consent (Section 133), releases the principal debtor (Section 134), or impairs the surety’s eventual remedy (Section 139). However, courts interpret these provisions narrowly to protect creditor rights.

Post‑Resignation Liability of a Guarantor

A recurring issue in corporate law is whether a guarantor’s liability ceases once they resign from directorship or dissociate from the company. Courts and tribunals have consistently held that resignation does not automatically discharge a guarantor’s liability under a continuing guarantee.

• Independent Contract: A guarantee is a separate contract between the guarantor and the creditor. It is not tied to the guarantor’s position in the company. Thus, resignation from directorship or management does not affect obligations under the guarantee.
• Continuing Guarantee: If the guarantee deed expressly states that it is continuing and irrevocable, liability persists until the guarantor issues a formal revocation notice under Section 130 of the Contract Act. Even then, revocation only applies prospectively; transactions already entered into remain binding.

Judicial View:

• In Subhash Aggarwal v. SBI (NCLAT, 2024–25), the Tribunal held that resignation in 2012 did not revoke the 2009 continuing guarantee. The liability continued for subsequent renewals and variations of the credit facility.
• In Sita Ram Gupta v. Punjab National Bank (2008), the Supreme Court reiterated that guarantor liability is co‑extensive with the debtor’s liability, and resignation or withdrawal from management does not discharge obligations unless expressly revoked.

Practical Consequence: Guarantors often assume that stepping down from directorship or ceasing involvement with the company ends their liability. In reality, unless a revocation notice is served and accepted, liability under a continuing guarantee endures.

Forgery Allegations and Liability of Guarantee

A recurring defence raised by guarantors is that subsequent guarantee deeds were forged or fabricated, and therefore, liability under the original guarantee should be discharged. Courts and tribunals have consistently rejected this line of argument, holding that forgery allegations on later documents cannot undo liability under an earlier valid continuing guarantee.

Judicial View:

In Rakhesh Bhailabhai v. SBI (NCLAT, 2024–25), the Tribunal described forgery allegations on subsequent deeds as a “bogey” and “specious argument” raised as an afterthought. It held that such claims could not discharge liability under the earlier genuine deed.

In Subhash Aggarwal v. SBI (NCLAT, 2024–25), the Tribunal similarly held that resignation and forgery pleas did not absolve liability under the 2009 continuing guarantee.

Practical Consequence: Forgery allegations may be investigated separately, but they do not affect the enforceability of an earlier continuing guarantee. Creditors can proceed against guarantors under Section 95 of the IBC, and tribunals have consistently upheld such petitions.

Judicial Interpretation: Supreme Court, High Courts, and Tribunals

Supreme Court Decisions

The Supreme Court has consistently reinforced the binding nature of continuing guarantees and the liability of guarantors.

• State Bank of India v. Indexport Registered (1992): The Court held that a continuing guarantee creates an ongoing assurance rather than a one‑time promise. Even if the debtor’s liability fluctuates, the surety remains bound until revocation.

• Sita Ram Gupta v. Punjab National Bank (2008): The Court noted that the liability of a guarantor is co‑extensive with that of the principal debtor under Section 128. A continuing guarantee binds the guarantor for successive advances unless revoked.

• Bank of India v. Sri Nangli Rice Mills Pvt. Ltd. (2025): The Court reiterated that balance sheet entries acknowledging advances or guarantees can extend limitation under Section 18 of the Limitation Act, thereby sustaining liability under continuing guarantees.

High Court Decisions

High Courts have also clarified corporate liability under continuing guarantees.

• M/S Anik Industries Ltd. v. IDBI Bank (MP High Court, 2019) -The Court recognised that a corporate guarantee executed as a “continuing guarantee” remains binding, based on the guarantee deed’s terms; the guarantor’s obligations continue until the borrower repays in full, along with interest, charges, etc.
• Syndicate Bank v. Channaveerappa Beleri & Ors. ( 2006)-In interpreting a continuing guarantee, the Court held that where the account is “live” (i.e., not settled), and the guarantor has not refused to make payment, the limitation period for suits does not begin to run. This illustrates that continuing guarantees keep obligations alive till actual discharge.
• M/s Lekh Raj Narinder Kumar & Ors. v. Union Bank of India & Anr. (Punjab & Haryana High Court, 2022)- The Court construed the guarantee deed's language; when the deed described the guarantee as “continuing security,” the liability persisted for future obligations, until proper revocation in writing.
• P.J. Rajappan v. Associated Industries (P) Ltd. & Anr. (Kerala High Court, 1989) — The Kerala High Court held that even if a guarantor did not physically sign the instrument, he could still be held liable if there was credible evidence of his involvement and consent , i.e. presence of a guarantee need not always depend on technical formality but on substance and conduct.

NCLT and NCLAT Decisions

Tribunals under the Insolvency and BankruptcyCode (IBC) have frequently dealt with guarantees, especially personal guarantees by directors and promoters.

• Subhash Aggarwal v. SBI (NCLAT, 2025): The Tribunal upheld insolvency proceedings against a personal guarantor. It held that the 2009 deed was a continuing and irrevocable guarantee, unaffected by later forgery allegations. Resignation from directorship did not revoke liability, and the plea that the debt was time‑barred was rejected.

• Anita Goyal v. Vistra ITCL (India) Ltd. (NCLAT, 2025): The Tribunal clarified that NCLT can entertain insolvency applications against personal guarantors even if no corporate insolvency resolution process is pending against the corporate debtor. This reinforced that personal guarantees are independent contracts, enforceable under IBC.

These rulings confirm that continuing guarantees are enforceable independent contracts, protecting creditor rights and maintaining corporate accountability.

Nature of Guarantees in Companies

In corporate practice, guarantees are often of two types:

• Personal guarantees by directors or promoters, securing loans to the company.

• Corporate guarantees by parent or holding companies, securing obligations of subsidiaries.

These guarantees are independent contracts, enforceable even if the principal contract faces disputes. Continuing guarantees bind guarantors for successive transactions unless expressly revoked. Courts and tribunals consistently hold that resignation or a change in management does not automatically discharge guarantees. Balance sheet entries and acknowledgements can extend limitations, keeping guarantees enforceable.

The jurisprudence on continuing guarantees in India underscores their binding and enduring nature. The Supreme Court has consistently held that such guarantees extend to successive transactions until revoked. High Courts have accepted corporate guarantees as enforceable obligations, though their tax treatment remains debated. NCLAT decisions affirm that personal guarantors cannot evade liability by resignation or collateral disputes, and insolvency petitions under Section 95 are maintainable.

In essence, a continuing guarantee is not a one‑time promise but a long‑term assurance, binding guarantors until expressly revoked. The liability of guarantors under Section 128 is co‑extensive, immediate, and independent, making guarantees one of the strongest securities available to creditors. For companies, this means guarantees, whether personal or corporate, carry enduring consequences, shaping the contours of credit, insolvency, and corporate governance in India.

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