₹14,131 crore has already been restored against a ₹6,203 crore loan, and the banks' claim over the United Breweries shares cannot survive that
Justices D.K. Singh and T.M. Nadaf set aside the DRT and DRAT orders and the Recovery Officer's attachment, holding a personal guarantee creates no proprietary security over unlisted assets and no security at all over jointly held shares.
The judgment opens, unusually for a debt recovery matter, with a meditation on how fortunes are lost. “The downfall of Vijay Mallya's empire due to a flamboyant lifestyle and excessive personal indulgence is one of the history's most enduring corporate tales,” it begins, before observing that building an empire takes decades of relentless discipline but destroying it requires only a few years of unbridled indulgence. What follows is a careful, document-by-document analysis of why two tranches of United Breweries Limited shares, together 7.92 per cent of a listed company, are not available to the consortium of banks that lent ₹6,203 crore to Kingfisher Airlines.
The petitioner is not a Mallya entity. Diageo Holdings Netherlands B.V. is a financial investment company incorporated in the Netherlands, a wholly owned subsidiary of Diageo UK PLC, and is not itself in the alcoholic beverages business. It paid a little over USD 140.97 million under a guarantee it had given to Standard Chartered Bank, and has spent a decade trying to realise the security that payment was meant to carry.
Two loans, not one
The confusion the Court had to unpick comes from the fact that there were two entirely separate borrowings, and the Debts Recovery Tribunal treated them as a continuum.
The first was the Kingfisher borrowing. Dr Vijay Mallya approached the consortium for working capital and term loans for Kingfisher Airlines Limited; the airline defaulted; he asked for a restructuring; and in April 2010 the consortium agreed. A Master Debt Recast Agreement dated 21 December 2010, amended on 24 December 2010, merged the existing term loans into a single rupee term loan facility and the working capital facilities into one, with the State Bank of India as lenders' agent. United Breweries (Holdings) Limited and Dr Mallya stood as guarantors under separate agreements of guarantee. The loan amount under the recast agreement stood at ₹6,203 crore. A security trustee agreement, an inter-creditor agreement and a trust and retention accounts agreement of the same date appointed SBICAP Trustee Company Limited as security trustee. Kingfisher's account was classified a non-performing asset on various dates between 2 November 2011 and 31 March 2013.
The second was the Watson borrowing, and it has nothing to do with Kingfisher. Watson Ltd, a Mauritius company of Dr Mallya's, took a series of loans from ICICI Bank UK PLC in 2006–2007 — facilities of USD 22 million, USD 28 million, EUR 12,250,000, EUR 3,750,000, USD 40 million, USD 4 million and USD 8 million, supported by the personal guarantees of Dr Vijay Mallya and Mr Sidhartha Mallya. Those guarantees were in turn supported by a Non-Disposal and Safety Net Arrangement Agreement dated 31 March 2009, whose Schedule VI listed, among other holdings, 1,04,86,666 UBL shares owned by Dr Mallya and 1,04,64,288 UBL shares owned jointly by Dr Mallya and his son. Clause 3.1(d) prohibited creation of any encumbrance over those escrow assets without ICICI UK's prior written consent; Clause 3.1(l) provided that on non-payment the shares would be sold or otherwise disposed of to realise the dues.
When Watson defaulted, a Share Pledge Deed dated 12 April 2013 was executed in favour of ICICI UK, over 1,04,86,666 shares held by Dr Mallya and 27,07,134 shares held jointly — representing 4.99 per cent of UBL's paid-up capital, although the Mallyas' holding was 7.92 per cent. The Court held this was a fresh pledge created on account of the defaults, that the shares became encumbered under it, and that ICICI UK became the pawnee under Section 172 of the Indian Contract Act, 1872, the deed being governed by Indian law.
The refinancing that was not a refinancing
In July 2013 Watson executed a facility agreement with Standard Chartered Bank for USD 135 million. Under it, the agreements with ICICI UK, including the share pledge deed, were terminated; an amount equal to the ICICI debt then outstanding, plus USD 500,000 for interest, fees, costs and commissions, was provided; USD 135 million was paid to ICICI UK in discharge of its dues. A fresh Share Pledge Agreement dated 29 July 2013 was then executed by Dr Mallya and Mr Sidhartha Mallya in favour of UTI, Standard Chartered's onshore security agent — this time over both tranches, 1,04,86,666 shares and 1,04,64,288 shares, that is the full 7.92 per cent.
Diageo's role was separate again. Under a Guarantee Commitment Agreement it undertook, following a term sheet of 4 July 2013, to guarantee Standard Chartered. The Backstop Guarantee Agreement of 5 August 2013 provided that if the borrower did not pay when due, Diageo would pay within 90 days of a demand notice issued by Standard Chartered's agent, as principal obligor in place of Watson. The guarantee fee was USD 5 million, payable by Standard Chartered to Diageo. Clause 2.4 provided for subrogation: all finance documents and titles vested in Standard Chartered would be transferred to Diageo.
Watson defaulted on 1 May 2015. UTI acquired voting rights over the shares and a notice of 11 May 2015 told the Mallyas that if payment was not received within one business day Standard Chartered would have the right to sell. On 19 June 2015 Standard Chartered entered negotiations with the Heineken Group to dispose of the shares — and before it could act, the Debts Recovery Tribunal passed its first interim order the same day. Unable to sell, Standard Chartered called on the backstop guarantee, and on 29 January 2016 Diageo paid USD 140,970,650.95 inclusive of interest, costs, fees and expenses.
How the tribunal orders stacked up
The consortium had filed Original Application No. 766 of 2013 before the DRT for recovery against Kingfisher under the recast agreement, with Dr Mallya a party. Counsel for Dr Mallya appears to have given an oral undertaking in those proceedings that he would not alienate or deal with his assets, but the DRT did not record it; the consortium therefore came to the High Court, which on 3 September 2013 injuncted Kingfisher, UBL and Dr Mallya from transferring, alienating, disposing of or creating third-party rights in their movable and immovable properties.
The consortium then applied in the Original Application for a declaration that the pledge over the UBL shares was illegal, null and void and that the shares were free of encumbrance. On 9 June 2015 Dr Mallya filed a memo stating that Standard Chartered and UTI were attempting to sell the shares and that he would have no objection to an order of status quo. On 19 June 2015 the DRT passed an ex parte ad interim order restraining Dr Mallya, Standard Chartered, UTI and Mr Sidhartha Mallya from transferring, alienating or creating third-party rights over the shares; a second such order followed restraining Standard Chartered and UTI from handing the shares to anyone except the consortium. A third, on 17 May 2016, attached shares held by Dr Mallya in Watson and restrained Watson from disbursing anything to him.
Diageo, which was not a party to the application that produced the third order, had to litigate its way in. This Court stayed the second interim order on 7 November 2015, directed that the shares remain with UTI and told the consortium to implead Diageo, which the DRT did on 5 February 2016. On 19 January 2017 the DRT dismissed the applications of Diageo and Standard Chartered, made the first interim order absolute and allowed all three applications of the consortium. The appeal to the Debts Recovery Appellate Tribunal brought an order of 21 July 2017 directing a pre-deposit of ₹3,000 crore in two instalments; this Court set that aside on 8 August 2017, holding that Diageo was neither borrower nor creditor nor guarantor. Meanwhile, on 3 June 2017, the Recovery Officer had attached both tranches of shares ex parte, and that attachment was stayed by this Court on 20 September 2017. The DRAT confirmed the DRT's order on 9 October 2018, and these writ petitions followed.
What happened in London
The parallel English proceedings matter to the result. Diageo and group entities filed a claim in the Commercial Division of the UK High Court in November 2017 against Dr Mallya, Mr Sidhartha Mallya, Watson and Continental Administration Services Ltd, seeking recovery of what Diageo had paid under the backstop guarantee; summary judgment was passed on 24 May 2019, holding Watson liable to pay USD 135 million and CAS liable for 50 per cent of any amount left unpaid by a stipulated date.
The consortium, for its part, had petitioned for Dr Mallya's bankruptcy. On 9 December 2019 it submitted skeleton arguments representing itself as an unsecured creditor; by order dated 9 April 2020 the UK court held that the consortium did in fact have security over Dr Mallya's assets and had failed to disclose that in the bankruptcy proceedings. It was given permission to amend on 18 May 2021, filed a re-amended petition on 24 May 2021 indicating willingness to relinquish security over his assets for the benefit of his creditors in the event of a bankruptcy order, and on 26 July 2021 Dr Mallya was declared bankrupt. On 9 April 2025 the UK court refused him permission to appeal against both the amendment order and the bankruptcy order, and allowed the consortium's appeal against the order of 9 April 2020, holding that it did have security over his assets.
A personal guarantee is a promise to pay, not a charge
The Court's first conclusion is that the shares were not continuously encumbered from 2009 onwards. The ICICI facility agreements and the share pledge deed of 12 April 2013 were terminated when the Standard Chartered facility agreement was executed in July 2013; once they were terminated, there was no pledge on the UBL shares. The pledge in favour of ICICI UK had covered 4.99 per cent of the paid-up capital; the pledge of 29 July 2013 in favour of Standard Chartered covered 7.92 per cent. The two sets of agreements were separate and distinct, and the later arrangement was not a continuation of the earlier non-disposal undertaking and pledge.
Nor was the Standard Chartered facility a refinancing or an assignment of the ICICI–Watson loan. ICICI UK was not a party to that facility agreement at all. The agreements between Standard Chartered and Watson, the share pledge in favour of UTI as onshore security trustee, and Diageo's backstop guarantee were independent of the ICICI loan agreements.
On the consortium's reliance on Dr Mallya's personal guarantee under the Master Debt Recast Agreement, the Court laid down the proposition squarely. A personal guarantee creates a personal obligation to the lender. It does not by itself create a proprietary security interest in the guarantor's assets, unless the guarantee contains a list of the assets and restrains the creation of any encumbrance over them. Clause 5(ii)(g)(2) of the personal guarantee did not list the assets, and in particular did not list the UBL shares. Those shares had been encumbered, but under the Non-Disposal and Safety Net Arrangement Agreement of 31 March 2009 executed in furtherance of the personal guarantees given for the ICICI loans — an agreement, with its parent facility, predating the recast agreement of 21 December 2010.
A personal guarantee coupled with a covenant not to encumber unspecified assets will not prevail over a subsequently created pledge of specifically identified assets, unless the earlier document itself created an enforceable proprietary security such as a charge. A personal guarantee is in substance a personal promise to pay; it creates no interest, lien, charge or priority over the guarantor's property. Whether a “negative lien” or “no encumbrance” clause creates a proprietary security depends on the language of the document and the parties' intention. For that the Court went to Bank of India Ltd. v. Rustom Fakirji Cowasjee, where the Bombay High Court held that a charge is not created merely by using expressions such as “negative lien”; there must be sufficient language indicating an intention to create an encumbrance enforceable against the property. In the cases where such clauses had been construed as creating a charge, the borrower had stated that he would not in any way transfer or alienate the property, the dominant intention being that the property remain intact and available for payment of the debt on default. Here, the assurance did not extend to any restriction on the sale of the assets at all.
What a co-owner can and cannot pledge
On the jointly held tranche of 1,04,64,288 shares the Court gave a separate answer. A surety's liability is immediate and co-extensive with that of the principal debtor — Section 128 of the Indian Contract Act, and the line of authority through State Bank of India v. Indexport Registered and Bank of Bihar v. Dr Damodar Prasad, with the passages from Pollock and Mulla and Chitty quoted there — but that concerns personal liability, enforceable against the surety, and not the creation of a charge over property. A co-owner, subject to the applicable law and the terms of the instrument, can create security over his own undivided share or interest in joint property. He cannot create security in respect of assets jointly held without the express consent of the joint owner. Dr Mallya's personal guarantee under the recast agreement therefore does not bind the 1,04,64,288 shares held jointly with Mr Sidhartha Mallya in any manner.
“It is for the Consortium of Banks and the Government of India to give quietus”
The Court's final reason is arithmetical, and it relied on a statement made on the floor of the Lok Sabha by the Finance Minister on 17 December 2024: that assets worth ₹14,131.6 crore, besides the UBL shares, have been restored from Dr Mallya to the consortium against a claim of ₹6,203 crore with interest. With the claim on a ₹6,203 crore loan almost settled through recovery of assets worth more than ₹14,131.6 crore, the Bench held, there would be no justification for the consortium's claim over the UBL shares. It went further, in a passage that reads as an appeal rather than a direction: it is Dr Mallya's flamboyant lifestyle, excessive personal indulgence and personal vanity that are coming in the way of giving quietus to the claims against the loan advanced to the defunct airline, and it is for the consortium and the Government of India to give quietus to the proceedings when ₹14,131.6 crore worth of assets have been restored against a loan of ₹6,203 crore.
The Court also corrected the record on Diageo's character. As Mr Vikram Huilgol, senior counsel for the consortium, submitted, it was never the consortium's case before the DRT that Diageo was part of the Vijay Mallya group, and the consortium never treated Diageo's claim over the shares with suspicion; the DRAT's observation to the contrary was contrary to the record and to the consortium's own case. The transactions between Standard Chartered and Watson, Diageo and the two Mallyas are bona fide commercial transactions. Diageo received a guarantee fee of USD 5 million from Standard Chartered for providing the guarantee.
The writ petitions were allowed and the impugned judgment and orders set aside. Dr Aditya Sondhi appeared as senior counsel for Diageo.