Bombay High Court: Letter of comfort only constitutes security if the conditions set out in Section 126 of the Indian Contracts Act 1872 are met


The Bombay High Court (HC) by Judgment dated 19th August 2020 (Judgment) rendered in LD-VC-IA No. 01 of 2020 IN LD-VC-SUIT NO. 120 of 2020 – Yes Bank Limited vs. Zee Entertainment Enterprises & Ors held that a letter of comfort would constitute security only if its terms satisfied the conditions set out in Section 126 of the Indian Contracts Act 1872 (Contracts Act).


  • The main dramatis personae in this area are:

(i) Yes Bank Limited (Yes Bank)

(ii) Zee Entertainment Enterprises Limited (Zee), the parent company of the Zee/Essel group of companies (Zee Group);

iii) Living Entertainment Limited (LEL), ATL Media Limited (ATL), Veria International Limited (Veria) and Living Entertainment Enterprises Pvt. ltd. (LEEPL) – all wholly owned subsidiaries of Zee;

  • In January 2016, certain companies of the Zee group, holding approximately 5% of the capital of Zee, subscribed to the capital of Veria via LEL and LEEPL.
  • On January 20, 2016, LEL entered into a put option agreement (POA) with ATL, under which LEL had the option to call on ATL to purchase 64.38% of Veria’s share capital. The POA was valid until July 29, 2026.
  • To finance this exercise as well as to refinance certain intercompany deposits used in connection with this exercise, LEL benefited from a USD 50 million loan (“loan”) from Yes Bank, which was notably governed by a letter of facility and an addendum thereto dated March 30, 2016, a credit agreement dated June 8, 2016 and several security documents (“facility documents”). Axis Bank, Dubai International Financial Center Branch (Axis Bank) has been appointed as the security trustee under some of the security documents. The facility documents provided for several “events of default”. Upon the occurrence of an event of default, Yes Bank had the right to exercise the put option under the POA and call on ATL to buy out LEL’s stake in Veria at a “strike price” within a “settlement date” so that with the funds so received, LEL could repay Yes Bank. One of the cases of default was the fall of the promoter’s shareholding in Zee beyond a certain threshold.
  • As security for the loan, Zee issued a comfort letter dated March 31, 2016 (LOC) to Yes. This is the document at the center of the dispute. As part of the LOC, Zee has, among other things, undertaken to “support [ATL] by injecting equity/debt to meet all of its working capital requirements, debt requirements, business expansion plans, honoring put options, purchase or payment agreements and warranties,” “ undertake all of its overseas operations through ATL and its subsidiaries” and “to hold at least 51% equity for the duration of the installation”. The line of credit would remain valid from the date of release of the facilities of Yes Bank until the date of its repayment.
  • On August 2, 2019, the promoters of Zee announced the sale of part of their stake in Zee. In response, Yes Bank wrote to Zeesaying that the assignment had triggered an event of default and demanded repayment of the loan.
  • On November 7, 2019, Yes Bank issued performance notices to LEL and ATL to liquidate its rights and a put option notice to ATL under the POA. LEL replied to the notice served on it by acknowledging its sums due and asked for a repayment period, which it did not do. ATL, for its part, did not buy back Veria’s shares.
  • Subsequently, Yes Bank sent three letters to Zee on November 21, 2019, January 9, 2020 and March 31, 2020 respectively. While the LOC was alluded to in the letter dated January 9, 2020 in which Zee was asked to “support” ATL by injecting funds in respect of its obligations thereunder, it is only in the letter dated March 31, 2020, which was addressed to Zee, its directors and Key Managerial Personnel (KMP) that Yes Bank has for the first time taken a position that the LOC was an “absolute, irrevocable and unconditional guarantee” and has asked Zee to repay the loan. Zee, in response, sent a letter dated June 11, 2020 to Yes Bank, denying its liability as guarantor, stating that its only obligation under the LOC was to keep ATL in liquidity and asserting that there was no contractual relationship between Yes Bank and Zee.
  • Injured by the position taken by Zee, Yes Bank filed the lawsuit as LD-VC-SUIT NO. 120 of 2020 (lawsuit) before the HC among others against Zee and its directors, LEL, Veria, ATL and LEEPL, seeking inter alia declarations that the LOC had the nature of a security and perpetual injunctions against Zee to alienate its assets until it repays the loan with interest. In the lawsuit, Yes Bank filed an interlocutory application being LD-VC-IA NO. 01 of 2020 (application) seeking orders against Zee to secure the debt.


The HC sought to consider whether the LOC would constitute security under section 126 of the Contracts Act and therefore whether Yes Bank was entitled to the remedies sought in the application.


  • The HC looked at Section 126 of the Contracts Act, which defines a “guarantee contract” as “a contract to perform the promise or discharge the liability of a third party in the event of default by the latter”. In this regard, it accepted Yes Bank’s contention that the form the guarantee took was immaterial. Along the same lines, Zee’s claim that there was no connection between her and Yes Bank was dismissed. The CH considered that the question to be answered was whether the nexus was in the nature of a contract of guarantee.
  • In this respect, the HC considered that a guarantee creates a very specific obligation, under which a guarantor unequivocally undertakes and guarantees the repayment of the debt of the principal obligor in the event of default by the latter.
  • The HC then considered the language of the LOC in this case and the behavior of the parties in this regard, in accordance with the principles of contractual interpretation established by the Supreme Court in Godhra Electricity Company Limited & Anr v State of Gujarat & Anr [(1975) 1 SCC 199].
  • The HC came to the conclusion that under the LOC, Zee was at best under an obligation to inject funds into ATL to enable it to meet its obligations under the POA and not repay the debts due by LEL to Yes Bank. With the exception of the letter dated March 31, 2020, all other correspondence issued by Yes Bank to Zee revealed that Yes Bank itself understood that Zee’s obligations under the LOC were limited to injecting funds into ATL . This was also confirmed by the pleadings in the complaint.
  • The HC reviewed the decision of the Delhi High Court (Delhi HC) in Lucent Technologies v ICICI Bank Ltd [2009 SCC OnLine Del 313] (Lucent) invoked by Yes Bank. In Lucent had held that the LOC involved in the case was not a guarantee, he had recognized that the parties should be bound to respect the bargain they had made in a commercial document and that the promising consequences of it had to be taken into account. In this regard, the Delhi HC, among others, relied on the decision of the Commercial Division of the Supreme Court of New South Wales, Australia, in Banque Bruxelles Lambert SA v Australian National Industries Limited [(1989) 21 NSWLR 502] (Bank Brussels). The CH considered that while accepting the aforementioned legislative proposal, in the Banque Bruxelles case, the court was seized of a claim for damages. While the relevant court held that the COL in this case was not a guarantee, it went on to award damages to the plaintiff for the defendant’s breach of its obligations under the said COL. In the ongoing lawsuit, no claim for damages had been made.
  • The HC also reviewed the decision of the Karnataka High Court in United Breweries (Holding) Ltd v State Industrial Investment & Development Corporation Limited [AIR 2012 Kar 65], where a divisional bench of the Karnataka High Court had ruled that the LOC involved in this case was not a surety. In this case, it was held that a guarantor was liable only to the extent of his guarantee – no additional liability could be imposed on him. In this case, it was clear from the terms of the LOC that Zee had only undertaken to inject funds into ATL and not to discharge its debt on its behalf. Therefore, the remedies sought in the application and prima facie, the suit, could not be granted.
  • In the above premise, the HC considered that the LOC would amount to a warranty if, reading its terms as a whole and taking into account the conduct of the parties, the requirements of Section 126 of the Contracts Act were fulfilled. The nomenclature of the document would be irrelevant. In this case, however, the LOC was found not to constitute a warranty and the claim was dismissed.


Although the CH’s view is prima facie, the judgment has important ramifications. Letters of credit are regularly issued by lenders as security for the facilities they have granted. Although the letter of credit in the matter here was found not to be a security, the judgment affirms the possibility that a letter of credit may amount to a security under section 126 of the contract if it is written in such a way as to demonstrate the issuer’s intention to act as guarantor. This needs to be verified from the terms of the LOC. Moreover, even assuming that an LOC is not a guarantee, the judgment left room for an action for damages to be maintained by a party injured by the non-performance of the obligations under an LOC by its issuer. . This is in accordance with the decision of Bank Brussels. In addition, a request for specific execution of obligations under a line of credit (Zee injecting funds into ATL to allow ATL to honor the put option) can also be maintained. Be that as it may, the key takeaway from the judgment is that a line of credit may not be of impeccable value, as is commonly believed, and that debtors under it can very well be held responsible in this regard.

“The contents of this document do not necessarily reflect the views / positions of Khaitan & Co but remain solely those of the author or authors. For any other questions or follow-up, please contact Khaitan & Co at [email protected]


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