New Delhi: The London Circuit Commercial Court Tuesday handed down its ruling in Bank of India vs Firestar Diamond FZE & Ors, a case that epitomises the challenges of cross-border financial litigation involving Foreign Exchange Management Act (FEMA) regulations and RBI approval.
The case involves a facility agreement governed by English law and a personal guarantee executed by diamond merchant Nirav Modi, governed by Indian law. The court had to reconcile these overlapping legal frameworks to determine whether Modi remained liable for more than $4.1 million debt to the bank.
The court’s final conclusion held Modi liable under his 2013 personal guarantee. Deputy Judge Simon Tinkler held that Bank of India had validly served its demands and that the debt was squarely within the scope of the guarantee.
Regarding FEMA regulations, in which guarantee by an Indian resident for a debt to a foreign entity needs approval from the Reserve Bank of India, the court accepted expert evidence that the absence of RBI approval did not make the guarantee void. Instead, it was a regulatory requirement that Modi himself was obliged to fulfil. His failure to obtain RBI consent could not be used as a shield against liability.
Also Read: Explainer: How Nirav Modi cheated PNB through fraudulent LoUs
Case history
In 2012, Bank of India, through its London branch, entered into a facility agreement with Firestar Diamond FZE, a Dubai-incorporated company linked to Modi’s diamond business. The agreement was governed by English law and provided Firestar with access to significant credit facilities.
Under this agreement, the bank advanced several sums to Firestar Diamond FZE and in 2013, Modi personally executed a guarantee, governed by Indian law, promising to repay the bank if Firestar defaulted. This guarantee became the central issue in the litigation.
By early 2018, allegations of large-scale fraud involving Letters of Undertaking from Punjab National Bank surfaced against Modi’s companies, with the alleged fraud exceeding $1 billion.
In the backdrop of the allegations, Bank of India served repayment demands on Firestar Diamond FZE, its Indian parent Firestar International, and Modi under his personal guarantee.
Despite repeated notices, demands and even a summary judgement in 2024 against Firestar Diamond FZE for $4.1 million plus interest, no payment was ever made by Firestar, its parent, or Modi.
Modi resisted liability, arguing that the guarantee was unenforceable under FEMA regulations without RBI approval.
Why Indian law prevailed
While the facility agreement was governed by English law and the seat of proceedings was in London, the personal guarantee signed by Modi in 2013 was expressly governed by Indian law.
This reflected the fact that Modi was a resident of India and had executed the guarantee in the nation. Guarantees given by Indian residents are subject to Indian statutes, particularly the Indian Contract Act, 1872, and FEMA, 1999.
Thus, the English court had to apply Indian law to determine whether the guarantee was enforceable. This dual application of law is common in cross-border contracts: the lending instrument may be governed by one jurisdiction, while securities or guarantees executed elsewhere remain subject to local law.
FEMA issue & RBI approval
The central Indian law question was whether the guarantee was void under Regulation 3 of the FEMA (Guarantees) Regulations, 2000. Regulation 3 prohibits an Indian resident from giving a guarantee for a debt owed to a foreign entity without prior approval from the RBI.
Modi argued that because no RBI approval had been obtained, the guarantee was unenforceable. The bank countered that the absence of approval did not invalidate the guarantee itself, it merely meant that performance might require RBI’s consent.
Expert testimony was decisive. The bank’s expert, Sushmita Gandhi, told the court: “RBI would be entitled to give consent, either prospectively or retrospectively, in relation to entering into and performance of the personal guarantee. The RBI might take the knowledge and responsibilities of the parties into account when making that decision, but the RBI had the lawful entitlement to grant consent if it so determined.”
She cited precedents, where the Supreme Court of India clarified that FEMA violations do not strike at the root of contractual validity.
The English court accepted this reasoning, concluding that the guarantee remained valid and binding, even if enforcement required RBI clearance.
The court held that “the answer to the question of the enforceability issue is that the personal guarantee is not void/unenforceable, because the RBI can at any point grant consent, which can be retrospective.”
Crucially, the judgement also highlighted that a party cannot rely on its own wrongdoing or failure to comply with regulatory requirements as a defence. Since the obligation to obtain RBI approval lay squarely on Modi as the guarantor, his failure to secure that approval could not be used to invalidate the guarantee.
(Edited by Nida Fatima Siddiqui)