Vijay Mallya's UBL Share Pledge For $135 Million Loan Takes Priority Over Consortium Banks' ₹6,203 Crore Claim: Karnataka HC

The Karnataka High Court on Wednesday held that a share pledge created in July 2013 over United Breweries Ltd (UBL) shares held by fugitive businessman Vijay Mallya and his son, Sidhartha Mallya, takes priority over the claims of a consortium of banks, which relied on a personal guarantee and an unsecured covenant restricting the creation of encumbrances.

A Division Bench of Justices D K Singh and T M Nadaf passed the ruling in petitions filed by Diageo Holdings Netherlands B.V., a Netherlands-incorporated financial investment company and a wholly owned subsidiary of Diageo UK PLC.

“Thus, we hold that the Share Pledge Agreement dated 29.07.2013 executed by Dr. Vijay Mallya and Mr. Sidhartha Mallya over the UBL shares would have priority over the Consortium of Banks as they held only a Personal Guarantee and an unsecured negative covenant,” the court held.

The dispute arose from a USD 135 million loan extended by Standard Chartered Bank (SCB) to Watson, a Mauritius-incorporated company described in the judgment as an overseas company of Vijay Mallya. Diageo Holdings Netherlands B.V. executed a backstop guarantee in favour of SCB on August 5, 2013, agreeing to repay the amount if Watson defaulted.

Vijay Mallya and Sidhartha Mallya pledged UBL shares in favour of UTI, SCB's onshore security trustee, under an agreement dated July 29, 2013. Watson defaulted on the loan on May 1, 2015. As an injunction passed by the Debt Recovery Tribunal (DRT) prevented SCB from selling the pledged shares to recover its dues, Diageo paid USD 140.97 million under the guarantee and subsequently claimed SCB's rights over the security.

The consortium's claim arose from loans of approximately ₹6,203 crore extended to Kingfisher Airlines under a Master Debt Recast Agreement dated December 21, 2010. The banks relied on Vijay Mallya's personal guarantee and a covenant restricting the creation of encumbrances to assert rights over the UBL shares.

The court held that the SCB facility was a separate transaction from the earlier loan extended by ICICI Bank UK to Watson. It found that the earlier agreements and pledge had been discharged before a fresh pledge over the UBL shares was created in favour of UTI. The fresh pledge covered shares representing 7.92% of UBL's paid-up capital, while the earlier pledge covered 4.99%.

Explaining the distinction between a personal guarantee and a proprietary security interest, the court observed that a personal guarantee creates a personal obligation to the lender but does not, by itself, create a proprietary interest in the guarantor's assets.

“A Personal Guarantee creates a personal obligation to the lender. It does not by itself create a proprietary security interest in the assets, unless the Personal Guarantee contains the list of assets and restrains from creating any encumbrance over the assets of the guarantor,” the court held.

The court further held that a personal guarantee coupled with a covenant not to encumber unspecified assets would not prevail over a subsequently created pledge of specifically identified assets, unless the earlier document itself created an enforceable security interest over those assets.

“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 over those assets,” the court observed.

The court also considered an alleged oral undertaking given on Vijay Mallya's behalf before the DRT on July 26, 2013, not to encumber the relevant assets. It held that an undertaking not recorded in the tribunal's order would not, by itself, nullify the subsequent pledge.

“An oral undertaking which was not recorded in the Court's order will not by itself nullify the pledge subsequently created,” the court held.

The court further held that Vijay Mallya could not create a charge over UBL shares jointly held with Sidhartha Mallya merely by giving a personal guarantee. Sidhartha Mallya was not a party to the Master Debt Recast Agreement and had not given the relevant personal guarantee.

“A co-owner cannot, merely by giving a personal guarantee, create a charge over the joint property or over the shares of the co-owner,” the court observed. It clarified that a co-owner may create security over his own undivided share, subject to applicable law and the terms of the instrument, but cannot encumber jointly held assets without the other co-owner's express consent.

The court also considered the consortium's recovery of assets worth ₹14,131.6 crore, apart from the UBL shares, against its claim of ₹6,203 crore with interest. Referring to a statement made by the Finance Minister in the Lok Sabha on December 17, 2024, it observed that the consortium's claim had been almost settled through the recovery of assets worth more than the amount claimed.

“There would be no justification for their claim over the UBL shares,” the court held.

In a pointed observation, the court also remarked on Vijay Mallya's lifestyle while discussing the continuing dispute over the banks' claims.

“More than anything else, we are also of the view that it is Dr. Vijay Mallya's flamboyant lifestyle, excessive personal indulgence and his personal vanity are coming in the way of giving quietus to the claims of the Consortium of Banks against the loan of INR 6,203 crores advanced to the defunct Kingfisher Airlines Ltd,” the court observed.

The court added that it was for the consortium and the Government of India to bring the proceedings to an end in view of the assets already restored.

The court also described the transactions involving SCB, Watson, Diageo and the Mallyas as bona fide commercial transactions. It observed that the consortium had not treated Diageo's claim as suspicious before the DRT and held that the contrary observation by the Debt Recovery Appellate Tribunal was inconsistent with the record. The court noted that Diageo had received a guarantee fee of USD 5 million from SCB.

The court allowed the writ petitions and set aside the challenged orders.

For Petitioner: Senior Advocate Aditya Sondhi, Advocate Poornima Hatti

For Respondents: Senior Advocate Vikram A Huilgol, Advocates Veerendra Patil, Ganpathi Hegde, Krutika Raghavan