"Strong-Arm Tactics": Bombay High Court Says Public Sector Banks Can't Request Look Out Circulars Against Defaulters, Quashes LOCs

The Bombay High Court recently observed that Look Out Circulars (LOCs) issued by Ministry of Home Affairs (MHA) against loan defaulters at the behest of public sector banks (PSBs) are strong-arm tactics to circumvent legal processes and violate Articles 14 and 21 of the Constitution.

“The LOCs boil down to nothing but a strong-arm tactic to bypass or leapfrog what PSBs clearly see as inconveniences and irritants — the courts of law”, the court said.

A division bench of Justice GS Patel and Justice Madhav J Jamdar struck down the LOCs as well as the provisions of governing Office Memoranda (OMs) that empowered PSBs to seek LOCs against loan defaulters.

The court held that the right to travel abroad, part of the fundamental right to life under Article 21 of the Constitution cannot be curtailed by an executive action without any governing statute or controlling statutory provision.

“For what is being suggested is that (a) there is no controlling statute; therefore (b) executive action must suffice, and consequently (c) mere executive action can infringe an Article 21 fundamental right. That is the inevitable consequence of this argument, and it simply cannot be accepted”, the court said, rejecting Union of India's argument.

The court rejected arguments of wider public interest justifying LOCs. “No amount of 'public interest' can substitute for a 'procedure established by law', i.e., by a statute, statutory rule or statutory regulation in the matter of deprivation of the right to life and personal liberty guaranteed under Article 21 of the Constitution of India”, the court held.

The court was dealing with a batch of petitions challenging the LOCs as well as the OMs. While some petitions challenged individual LOCs, others contested the validity of the OMs themselves. Certain amendments to the OM allowed PSBs to request LOCs against defaulting borrowers, including guarantors or directors of corporate debtors. Typically, these LOCs are deployed to prevent individuals from traveling overseas without prior notice or disclosure of reasons.

PSBs defended the LOCs, citing the need to prevent flight risks posed by defaulters, safeguarding public funds and economic interests.

The Union of India asserted that it merely implemented LOCs in conformity with the amended OMs, leaving the validity of claims to the originating agencies.

The court found that the OMs do not constitute law under Article 13, and could not curtail fundamental rights.

The court acknowledged that beyond the issues with PSB-related LOCs, there exist numerous scenarios where LOCs, even without impounding passports, may be necessary and lawful. It noted the absence of a universal standard for LOC issuance and highlighted examples such as those involving detainment by local police or customs enforcement, which may be legitimate and not covered by the Passports Act.

The court noted that the OMs do not grant broad powers but only authorize LOCs in specific circumstances, with the responsibility resting on the originating agency to ensure compliance with legal and constitutional requirements. The court said that OMs are intended for exceptional cases and that the possibility of abuse by PSBs does not render them invalid. Thus, the court held that the OMs are not generally ultra vires the Constitution.

However, the provisions of OMs which empower Chairmen/Managing Directors/Chief Executive Officers of all PSBs as originating agencies to seek LOCs are unconstitutional, the court held. The court deemed it arbitrary, unreasonable and violative of Article 14, as there was no logical reason for treating PSBs differently from private banks. It noted the disproportionate impact on individuals borrowing from PSBs compared to private banks. The court highlighted that potentially compromising Article 21 rights of PSB borrowers based on their choice of lender is absurd.

The court said that OMs, being executive instructions, do not constitute "law" or "procedure established by law." It emphasized that OMs alone cannot restrict the fundamental right to travel abroad and, LOCs issued under the OMs following faulty process or in violation of fundamental rights cannot be sustained.

The court noted that the OMs failed to provide adequate guidelines for issuing LOCs at the behest of PSBs. The court highlighted the arbitrary exercise of power, lack of oversight mechanisms, and absence of disclosed guidelines applicable to PSBs, which raised concerns about the unguided and uncanalized nature of this authority. The court emphasized the violation of natural justice principles and fundamental rights under Articles 14 and 21 of the Constitution, especially considering the self-interest of PSBs in debt recovery.

Additionally, the court questioned the effectiveness of LOCs in debt recovery and challenged the notion of preventing overseas travel as a permissible restriction on Article 21 rights.

“Not once have we been shown that preventing anyone travelling abroad has even remotely addressed the issue — viz., that debt has been recovered because the person has been denied permission to travel. Indeed, carried further there is no reason on this logic why a person should simply be prevented from travelling overseas. Even if it were so shown, this would not bring it within the framework of a permissible restriction on an Article 21 right.”

It held that the LOCs failed to meet Wednesbury principles of reasonableness and tests of proportionality.

Further, the court noted the existence of the Fugitive Economic Offenders Act, 2018 as a statutory measure against economic offenders, which does not entail the unilateral prevention of overseas travel. It concluded that this Act undermines the rationale behind PSB-driven LOCs and contradicts justifications based on public interest or economic concerns.

Thus, the court quashed all LOCs issued by public sector banks, directing the Bureau of Immigration to disregard them and update databases accordingly and to apprise all authorities at ports of embarkation about the invalidation of PSB-issued LOCs.

The court clarified that this judgment wouldn't affect existing restraint orders issued by a competent authority such as courts and tribunals or banks' ability to invoke the Fugitive Economic Offenders Act, 2018. The banks are at liberty to apply to any court or tribunal under for an order against an individual borrower, guarantor or person indebted restraining such person from travelling overseas, the court added.

It also would not prevent Union of India from framing an appropriate law and establishing a procedure consistent with Article 21 of the Constitution, the court said.

Case no. – Writ Petition No. 719 of 2020

Case Title – Viraj Chetan Shah v. Union of India and Ors.