English court confirms failure by guarantor to obtain local law permission for a guarantee is no bar to enforcement

TLT recently obtained judgment in the Commercial Court on behalf of IDBI Bank Limited (IDBI) in the case of IDBI Bank Ltd v Axcel Sunshine Ltd & Anor.

The judgment is of particular note to Indian banks, but also provides a useful precedent for all international banks when faced with an argument that a guarantee is unenforceable due to an alleged breach of local laws.

Background

IDBI, had lent US$ 67M to the First Defendant (Axcel), a company incorporated and registered in the BVI, under a Credit Facilities Agreement (the CFA). The funds lent under the CFA were to be used to discharge previous liabilities owed to IDBI by companies within the wider corporate group of which the Second Defendant (Siva) was the parent.

As part of the security package for the lending, Siva provided a letter of comfort (the LoC) to IDBI. Siva was a company incorporated and registered in India. The LoC contained an English governing law clause and provided that the English Courts would have exclusive jurisdiction.

Axcel failed to repay the sums lent under the CFA. IDBI obtained judgment against Axcel in 2018 for sums outstanding under the CFA; however, save for a small recovery, Axcel failed to satisfy the judgment debt. The proceedings continued against Siva. Sums outstanding under the CFA at the date of trial, including accrued interest, were in the region of US$ 145M.

The Letter of Comfort

IDBI relied on the LoC as a legally binding contract of guarantee and / or indemnity. Siva sought to defend IDBI’s claim on several bases, including that the LoC contravened Indian law and therefore should not be enforced by the English court.

In advance of considering those points in detail, the Court also had to determine whether, as a matter of its construction, the LoC contained both a guarantee and an indemnity in respect of the CFA. It found that it did.

Contravention of local law

Siva argued that the Court should not enforce the LoC as its performance would contravene the Foreign Exchange Management (Guarantees) Regulations 2000 (FEMA).

Regulation 3 of FEMA states:

“… Prohibition. Save as otherwise provided in these regulations, or with the general or special permission of the Reserve Bank, no person resident in India shall give a guarantee or surety in respect of, or undertake a transaction, by whatever name called, which has the effect of guaranteeing, a debt, obligation or other liability owed by a person resident in India to, or incurred by, a person resident outside India …”

Siva argued that performance of the LoC would be illegal and unenforceable as a matter of Indian law on the basis that no approval for the LoC had been obtained by the Reserve Bank of India (the RBI). Siva therefore argued that the principle in Ralli Bros v Compania Naviera Sotay Aznar [1920] 2 KB 287 applied, namely that under English law the English Court will not enforce a contract where performance of that contract is forbidden by the law of the place where it is to be performed.

Having considered Indian law expert evidence, the Judge (Mr Lionel Persey KC sitting as a Judge of the High Court) concluded that the LoC did fall within the ambit of Regulation 3 of FEMA on the basis that it was a guarantee and/or had the effect of guaranteeing the obligations of Axcel.

The Judge also concluded, however, that the LoC was not void, illegal or invalid under FEMA. In this regard, the Judge accepted IDBI’s Indian law expert’s evidence that, where prior permission is not required but can be applied for ex post facto, the relevant guarantee remains enforceable. The Indian case law showed a consistent proposition that a party which should have, but had not, sought permission for an act could not subsequently rely on that failure to avoid a liability which would have otherwise arisen but for that failure. In particular, the Judge also noted the judgment in Ultrabulk v Jagatramka [2017] EWHC 2792 (Comm) in which the Court had also concluded that FEMA did not require RBI permission prior to entering into a guarantee (a decision subsequently affirmed by the Gujarat High Court when considering whether the English judgment in Ultrabulk was enforceable in India).

The Judge also took note of the fact that Siva could not show that it had attempted to obtain RBI approval or that permission had been refused. The Judge concluded that an Indian Court would enforce the LoC.

Key takeaway

This will be a welcome decision for Indian banks in relation to the enforcement of foreign currency loans backed by English law guarantees. As one of the preeminent English law firms for Indian bank work, TLT often sees the same argument concerning a breach of FEMA, which following this judgment should no longer be capable of being run by defendants.

Whilst this decision specifically concerns an Indian statute, it should also offer wider comfort to international banks seeking to enforce English law guarantees but facing allegations of contravention of local laws.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2025. Specific advice should be sought for specific cases. For more information see our terms & conditions.