Gujarat High Court Quashes Look Out Circular Issued Prior To Declaring Borrower As Wilful Defaulter

The Bench comprising Justice Nikhil S. Kariel observed, “In the considered opinion of this Court, the observation that the Bank, without declaring the petitioner therein as willful defaulter and without assigning any reasons as to how the petitioner travelling abroad will be detrimental to the economic interest of the country and the fact that though the petitioner therein as well as the petitioner herein were declared as willful defaulter after issuance of the LOC, and whereas the order of declaring willful defaulters dated 6.6.2020, having been quashed by this Court vide order dated 21.9.2020, it would appear that no proceedings have been initiated against the petitioner also.”

BACKGROUND FACTS

Subhash Kedarnath Tibrewal ("Mr. Subhash") is the Promoter and Director of M/s. Sarthak Creation Private Ltd. ("Company"). The Bank of Baroda ("Respondent No. 2/Bank") provided credit facilities to the Company and Mr. Subhash along with his wife Mrs. Bindu Tibrewal ("Petitioner") were personal guarantors of the loan. In 2015, the Company's account was classified as Non-Performing Asset (NPA).

In 2017, the Company filed a petition under Section 10 of the Insolvency & Bankruptcy Code, 2016 ("IBC"), seeking initiation of Corporate Insolvency Resolution Process (CIRP) against itself. The National Company Law Tribunal ("NCLT") admitted this petition. Subsequently, in 2018 the Company was sent into liquidation.

On 29.10.2019, Mr. Subhash and Petitioner were departing from the Airport in New Delhi for international travel. The Customs Authority at Immigration informed them that a Lookout Circular (LOC) had been issued by the Ministry of Home Affairs against them, on the request of the Bank. The Petitioner and her husband were denied permission to travel abroad. Mr. Subhash had filed a writ petition before the High Court, wherein the Look Out Circular was quashed by the Co-ordinate bench of the High Court on 19.10.2022 in respect to Mr. Subhash alone. 

Further, the Petitioner and Mr. Subhash was declared a wilful defaulter by the Bank after issuance of the Look Out Circular. However, proceedings of wilful default were quashed by the High Court in 2020.

Meanwhile, insolvency proceedings were also initiated against the Petitioner and the moratorium under Section 96 of IBC was imposed. 

The Petitioner filed a writ petition before the High Court challenging the Look Out Circular and reliance was placed on the Co-ordinate Bench decision dated 19.10.2022. It was argued that the Look Out Circulars have been issued in violation of Articles 14 and 21 of the Constitution of India. 

The Bank argued that the Petitioner had preferred a personal insolvency application before the NCLT. In view of the interim moratorium imposed, no pending legal action or proceedings can be proceeded further. Therefore, the Petitioner is not entitled to file the writ petition.

HIGH COURT VERDICT

The Court observed when an application is filed under Section 94 or Section 95 of IBC, an interim moratorium commences in respect of 'all the debts'. Further, when the moratorium is imposed under Section 96 of IBC, ‘any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed'.

"Section 96(1)(b)(ii) inter alia states that the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt. Considered in context of the Code, it would clearly appear that the interim moratorium comes into effect when a debtor or a creditor either directly or through the insolvency professional applies to the Adjudicating Authority for initiating an insolvency resolution process and whereas the interim moratorium is in aid of such process", the Court observed.

The Court noted that the Look Out Circular was issued even before the Petitioner was declared a wilful defaulter and a co-ordinate bench of the High Court had already quashed the Cicular as regards a co-debtor (Mr. Subhash). Therefore, the Bank's contention that in view of the moratorium the writ petition could not have been filed cannot sustain.

“An application preferred by a debtor challenging issuance of a Lookout Circular, more particularly on the ground that the Lookout Circular had been issued even before the debtor had been declared a willful defaulter and furthermore when a learned Co-ordinate Bench of this Court has quashed the Lookout Circular as regards a co-debtor, therefore, the submission of the learned Advocate for the respondent-Bank with regard to Section 96 of the Code cannot be countenanced,” the bench added.

The Court has quashed the Look Out Circular and the Bureau of Immigration has been directed to not prevent the Petitioner from travelling abroad based on the pending LOC at the instance of the Bank. 

“Furthermore, liberty as reserved in favour of the respondent-Bank by the learned Co-ordinate Bench, i.e. the order not restraining the respondent-Bank from seeking issuance of fresh LOC in strict compliance of the office memorandum dated 27.10.2010 issued by the Ministry of Home Affairs, in future, is also reserved in favour of the respondent No.2-Bank herein,” the court said while disposing of the petition.

Case Title: Bindu Tibrewal W/O Subhash Kedarnath Tibrewal Versus Joint Secretary, Ministry Of Home Affairs

Case Citation: 2023 Livelaw (Guj) 139

Case No.: R/Special Civil Application No. 3251 Of 2023

Counsel for Petitioner: Ms Pragati Bansal, Advocate For Thakkar And Pahwa Advocates(1357) 

Counsel for Respondents: Bhaskar Sharma(9209), Mr Ankit Shah(6371).

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