Indian Banking Entities Can't Request "Look Out Circular" For Recovery of Dues Owed To Their Foreign Sister Concerns: P&H High Court

On issuance of Look Out Circulars, the Punjab and Haryana High Court recently held that an LOC could not be requested by Indian banks to recover the dues owed to their foreign sister concerns.

Rejecting the argument that these activities affect the economic interest of India, a Division Bench of Justices Ramchandra Rao and Harkesh Manuja held that no adverse effects on the economic interests of India have been made out in the instant case. It observed,

"How such a thing can happen if a foreign incorporated Company M/s AIF, UAE owes money to UAE based entities of the Bank of Baroda and the SBI, is not explained by any of the respondents...By no stretch of imagination can it be said that the dues of Bank of Baroda, Dubai and SBI, Dubai are the dues of their Indian sister concerns. This is because the Dubai entity and the Indian entity have separate and distinct personalities."

The Court was hearing a plea challenging the lookout order issued by the Bureau of Immigration against the Directors of a UAE based company, preventing them from travelling abroad.

The company had borrowed loans from the Bank of Baroda, Dubai and SBI, Dubai, wherein the petitioners were guarantors. However, the loan accounts turned into non-performing assets, and an outstanding amount to Rs. 290.62 crores had to be recovered. Moreover, the petitioners are said to have committed fraud and engaged in cheque bounce cases leading to conviction by a Dubai Court in one of these cases, with imprisonment for three years.

It is also stated that both petitioners had fled UAE and are staying in Delhi, India and they may leave India at any point of time to avoid legal actions and may not return to India. Therefore, the LOCs were issued so that they cannot be allowed to leave India.

On the question of maintainability, it was held that though the respondents may be based outside Haryana, part cause of action arose (based on residence of the petitioner and mortgaged properties location) within the jurisdiction of the Court and thus it has territorial jurisdiction to entertain this petition under Article 226(2) of the Constitution of India. It relied on the case of Kusum Ingots & Alloys v. Union of India & Anr., where it was held that even if a small fraction of cause of action accrues within the jurisdiction of the High Court, maintainability can be justified.

Referring to the relevant law in force, the Court held that LOCs were permitted to be opened essentially against persons: (i) involved in cognizable offences; and (ii) who was evading arrest and not appearing in the trial Court despite non-bailable warrants or other coercive measures; and (iii) where there was a likelihood that they would leave the country to evade trial/arrest.

However, as per the Indian Law, offence of dishonour of cheques is a non-cognizable offence. Thus, the Court observed,

"It was intended as a coercive measure to make a person surrender to the investigating agency or Court of law. But where the subject of the LOC is not involved in any cognizable offence, he cannot be detained/arrested or prevented from leaving the country. The originating agency can only request that they be informed about the arrival/departure of the subject in such cases."

It observed that initially Managing Directors and Chief Executive Officers of the Public Sector Banks weren't authorised to make requests for the opening of LOCs. They were included in the list of authorities who can seek LOCs eventually. This was done to enable LOCs to be issued against the persons who are fraudsters/persons who wish to take loans and run against the economic interests of India or in the larger public interest.

The Court held that in the instant case, the request for issuance of LOC alleging loan defaults should not have been acceded to as: (i) office memorandums by the Union of India cannot have an extra-territorial operation and apply to loan defaults caused to a bank incorporated and based out of UAE; and (ii) it cannot be said that dues of banks in Dubai are the dues of their Indian sister concerns, as they have separate and distinct personalities.

The Court noted that the documents issued by the Union of India and the Ministry of Home Affairs do not draw a line as to the quantum of default that will be considered detrimental to the economic interests of India. It observed,

"Merely because the word 'public' is used in the exception clause in the OM, it does not elevate a mere default to an exceptional plane. It cannot be said that the departure of the petitioner from the country would adversely impact the economy of the 'country as a whole and destabilize the 'entire economy' of the country."

Deciding in favour of the petitioner, the Court held that the subject of a lookout circular could not be detained or arrested where there is no cognizable offence. It noted that the originating agency could only request that they be informed about the arrival or departure of the subject in such cases.

It held that the issuing authority had not applied its mind to the request for the Look Out Circular (LOC) made by the Indian banks. The LOCs were issued mechanically without enquiring whether the grounds for issuing a lookout circular were fulfilled or not, it added.

Referring to the case of Maneka Gandhi, the Court observed that the right to travel abroad is now a part of the fundamental right to life and liberty under Article 21, which can only be restrained on a very high threshold, which was not met in the instant case.

Case Title: Vikas Aggarwal and Anr v. Union of India & Ors

Citation: 2022 LiveLaw (PH) 264 

Counsel for the petitioner: Mr Anand Chhibbar, Sr. Advocate assisted by Mr Nitin Kaushal, Mr Tanuj Sud, Mr Ajay Kumar and Mr Harshita Ahluwalia.

Counsel for the respondent(s): Mr Satya Pal Jain, Additional Solicitor General of India with Ms Shweta Nahata.  Mr Gaurav Goel, Mr.D.K. Gupta, Mr Abhay Gupta and Mr.J. Shivam Kumar.

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