Public Sector Banks Can Seek Look Out Circulars Against Defaulters Only If Detrimental To Economic Interest Of India: Kerala High Court

The Kerala High Court recently held that the public sector banks can request for opening of Look Out Certificates (LOC) against defaulting account holders, only if the departure of the defaulter would be detrimental to the economic interest of India or it would not be in the larger public interest.

Justice V.G. Arun, while holding so, went on to observe that the Office Memorandums (OMs) do not empower the banks to originate Look Out Circulars, infringing the petitioner's liberty, as long as their movement to the foreign country is not detrimental to the economic interest of India or is against the larger public interest.

"The expressions 'economic interest of India' and 'larger public interest' will not take in violations of commercial contracts between a bank and its customer. Such an interpretation will result in liberty being sacrificed to safeguard the commercial interest of banking institutions. There cannot be such a constructed interpretation of the dynamic concept of 'liberty' enunciated and guaranteed by the Constitution of India", it was observed.

The Court in the instant case was dealing with two writ petitions. In WP (C) No.18168 of 2022, the petitioner was one of the guarantors for the credit facility availed by an establishment engaged in processing and sale of raw cashew, and it had availed a credit facility to the tune of Rs.14,50,00,000/- from the Bank of Baroda. Repayment of the loan was however, defaulted, which the petitioner submitted was due to the setback suffered by the cashew industry during the floods in 2018 and 2019 and was not willful default. Subsequently, the Bank declared the loan account as a Non-Performing Asset (NPA) and initiated recovery proceedings under the SARFAESI Act, 2002. The Bank also declared the petitioner and other guarantors as willful defaulters, which was challenged before the High Court of Kerala in another writ petition, and in which the Court had declared that the communications and proceedings declaring the petitioners as willful defaulters were to be quashed and the Bank was directed to consider the case afresh. During this time, when the petitioner sought to travel to Dubai for business purposes, he was prevented from doing so by the third respondent Emigration Officer on the ground that Look Out Circular (LOC) was pending against him. 

In the other writ petition, W.P. (C) No. 15649 of 2022, the petitioner is the proprietor of a cashew processing and exporting unit, Asian Firdous Cashews, and had availed credit facilities from the UCO Bank. Due to non-payment, the loan fell into arrears, and the Bank declared the account as an NPA on 31st May 2019. The Bank initiated various recovery measures, including initiation of revenue recovery proceedings against the petitioner's father. The revenue recovery proceeding was challenged in another writ, subsequent to which an interim stay order was issued. During this time, the petitioner had to travel to Dubai in connection with a criminal case instituted by him against a purchaser in Dubai, and he was also prevented from doing so by the third respondent Emigration Officer on the same grounds as in the other writ petition before the Court. 

The Court in this case pondered upon the question as to whether LOCs could be opened against defaulting borrowers/guarantors at the instance of lending institutions/Public Sector Banks. 

It was submitted on behalf of the petitioners by the counsels Advocates J. John Prakash and P. Pramel, that was illegal, and in the absence of any enactment empowering the Banks to seek issuance of Look Out Circulars, there cannot be any curtailment of the liberty of a citizen to travel abroad. It was further contended that the petitioners had the right to be informed about the grounds for the curtailment of their movement, and in the instant case, no such grounds had been provided.

On the other hand, it was submitted on behalf of the respondents by the counsels, the Standing Counsel for the Bank of Baroda, R. Rema, the Standing Counsel for UCO Bank, Deepak Joy, the Central Government Counsel, V. Girishkumar, and the Assistant Solicitor General of India, S. Manu, that declaration of the borrower as wilful defaulter and issuance of Look Out Circular against him are distinct and separate actions. It was submitted that the Court's interference with the declaration of the petitioner as wilful defaulter does not take away the bank's right to seek issuance of LOC against him, and further that the respondents were authorized to issue the LOC against him by virtue of the Office Memorandum which authorized them to do so. It was pointed out that in case of the first petition, despite the petitioner offering to settle the account for Rs.10.60 Crores as against the contractual dues of more than Rs.23 Crores, he failed to abide by the promise, indicating that he was not genuinely interested in settling the loan account and may attempt to shirk away from the liability.

It was submitted that initially look Out Circulars could be opened only if the balance outstanding from the defaulter was more than Rs.50 crores, but the amount is now reduced to Rs.5 crores, and in this circumstance, the respondent Bank had constituted an Advisory Committee for deciding the cases in which LOC is to be opened against borrowers/guarantors who are not red flagged/willful defaulter, non-cooperative borrower or fraudster. It was contended that since the bank had initiated action for declaring the petitioner as a willful defaulter, it had every right to request for the opening of LOC. On behalf of the Emigration authorities, it was submitted by the Central Government Counsel that the petitioners had been intercepted based on the respective LOC requests from the Banks, and the legal liability for the action taken by the emigration authorities, in pursuance of the LOC, rests with the originating agency.

It was in this context that the Court found that the issuance of LOC was to be resorted to "only in exceptional cases and for reasons enumerated therein". 

In the instant context, the Court found that although in in W.P(C).No.18186 of 2022, the petitioner had been named a willful defaulter, the communications and proceedings issued by the Bank in that regard had been quashed, and the Bank had no other case that the petitioner had been declared a willful defaulter after that. With respect to W.P(C).No.15649 of 2022, the request for issuance of LOC was made on the premise that the 'the account holder is in the process of being declared as wilful defaulter', and even after 2 years, the status quo continued. In this regard, the Court concluded that both the petitioners were mere defaulters of loans availed from the respondent banks.

Importantly, it was observed by the Court, 

"It is not as if the OMs authorize the banks to seek issuance of look out circulars against every defaulting account holder. Even if for the sake of argument it is accepted that the Banks can request for opening of LOC against willful defaulters, that can only to be against a person declared as willful defaulter, after following the procedure prescribed in the Master Circular issued by the Reserve Bank of India".

Thus, it was in this regard the Court held that the issuance of the LOCs against the petitioners were bad, and that the Banks could not prevent the petitioners from travelling abroad based on the pending Look Out Circulars. It was added that the judgment does not interdict the banks from seeking issuance of fresh Look Out Circulars in strict compliance of the Office Memorandums issued by the Ministry of Home Affairs.

Case Title: Shinas A. Firdaus v. Union of India & Ors and D. Pradeep Kumar v. Union of Indian & Ors. 

Citation: 2022 LiveLaw (Ker) 476

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