Banks cannot request issuance of Look Out Circular for every loan default: Calcutta High Court

A default in payment of loans to a bank, the pendency of liquidation proceedings to recover such debts or the amount of the loan in comparison to the annual budget of a State by themselves are not grounds for the issuance of a Look-Out-Circular (LOC), the Calcutta High Court recently observed [Vishambhar Saran vs. Bureau of Immigration & ors].

Justice Shampa Sarkar opined that every loan default cannot automatically be said to have a detrimental effect on the economic interests of the country which would warrant the issuance of an LOC.

"Default of the borrower cannot be read into the expression “detrimental to the economic interest of the country”. In order to cause injury to the economic interest of the democracy of India, the commission of alleged offence of default must be of high degree so as to shake the growth, financial stability, business transactions, bilateral trade relations, investments, stock markets etc. ... Non-payment of the loan and the dues of the bank, cannot be equated to an act of destabilizing or affecting the economic interest of the country. The freedom of movement of a citizen of India is a valuable right and cannot be infringed except by imposing reasonable restrictions," the Court explained.

The Court further observed that the expression "economic interest" as used in the Central government's 2010 policy on LOC issue (as amended up till 2021) cannot be given a narrow interpretation to mean and include the conduct of business between a bank and a defaulter.

"In the absence of any input that such borrower was likely to flee India and such departure would disrupt or adversely affect the economy of the country or jeopardize the bilateral business relationship and/or the strategic relationship of India with other countries, such request could not be made." the Court explained.

An LOC can be issued only in exceptional cases, even if the criteria laid down in the government's LOC policy was satisfied, the Court further noted.

"Mere pendency of liquidation proceeding for recovery of debts by the secured creditors cannot ipso facto be a reason for issuance of LOC as the same would not fall under the exceptional cases clause ... In the opinion of the court, persons who had taken loan from public sector banks and had laundered money and whose actions had caused disruption to the economic stability, shares and stock market or had affected the current economic growth of the country, would come within the exception clause." the Court went on to remark.

When may Public Sector Banks request for LOC issue?

The Court acknowledged that in 2018, the Union Ministry of Finance had permitted the inclusion of "fraudsters" or those who had wilfully defaulted on loans or laundered money in the category of persons against whom an LOC may be issued.

In the same year, the Court noted that Chairman/ Managing Directors/ Chief Executive of all Public Sector Banks were included in the list of "originating agencies" permitted to make a request for the issuance of an LOC against wilful defaulters and fraudsters. Such inclusion was made following a suggestion by the Central Bureau of Investigation (CBI).

Even so, such a request could only be made by such banks if the defaulters have tried to escape into a foreign jurisdiction, thereby warranting their inclusion in the category of subjects whose departure would be harmful to the economic interests of India, the Court observed.

In order to make a request for issuing LOC in such cases, the bank has to establish that the departure of the defaulter, on the basis of intelligence reports, would be detrimental to the sovereignty, security, integrity, bilateral relations or the economic interests of India, the Judge emphasised.

On comparison of loan amounts to State budgets

Notably, the Court also expressed disagreement with the Karnataka High Court's judgment in Dr. Bavaguthu Raghuram Shetty vs. Bureau of Immigration and Ors, which the Judge noted had compared the loan amount to a State's annual budget while considering a plea challenging an LOC.

"Whether the outstanding loan with interest, would be more than the budgetary allocation of a particular state or not, in my opinion, is not one of the parameters to be considered," the Calcutta High Court said.

However, the High Court added that the Karnataka High Court judgment was not applicable to the facts at hand.

In the Karnataka High Court case, the bench had observed,

"... in this case, the amount involved is astronomically high when compared with the Calcutta case, which is about Rs.2800 Crores. It is more than one third of the annual budget of a State like Sikkim. Thus the amount involved in this case is bound to have serious impact on the economy of this Country ..."

Exceptional criteria for issuance of LOC not satisfied in present case

The Court was dealing with a challenge to an LOC request made by the Managing Director and Chief Executive Officer of the Bank of Baroda (BOB) against the director of a company undergoing liquidation, Visa Power Limited.

Justice Sarakar, however, found that that no exceptional circumstance warranting the issuance of an LOC was present in this case.

"There is no evidence that on account of the default committed by the Visa Power Limited, the economy of India had been shaken," the Court observed.

Merely because the accounts of the company was a non-performing asset (NPA) or because the petitioner was a promoter director, such director could not be termed a "fraudster who had indulged in money laundering activities, and disrupted the economy of India," the Court remarked.

A bald assertion that the director's departure from the country would be detrimental to the economic interests of India is not sufficient to request for the issuance of an LOC, the Court opined further.

"There is no allegation that the activity of the petitioner led to upheavals in the stock market, business activities, investments, trade, growth and development etc. There is no evidence that the petitioner had tried to escape to a foreign jurisdiction to avoid legal consequences of such action ... the conditions which must pre-exist as per the existing policy of the government for opening LOC, are absent in this case," the judgment stated.

The LOC request made by BOB was, therefore, quashed by the High Court, which opined that the bank had acted arbitrarily in an attempt to curtail the personal liberty and fundamental rights of the petitioner-director.

All the same, the judge added that the bank is at liberty to request the immigration authorities to intimate about the entry and exit of the petitioner to and from the country.

Senior Advocate Sabyasachi Choudhury, and advocates Rajarshi Dutta, VVV Sastry, Tridib Bose, and Debjyoti Saha appeared for the petitioner.

The respondents were represented by Senior Advocate Jaydip Kar and advocates Dwaipayan Basu Mallick, Avishek Guha, Akansha Chopra, and Debarati Das.

[Read Judgment]