Mere Default Of Business Loan Cannot Justify Issuance Of LOCs, Curtail Right To Travel Abroad: Delhi High Court

The Delhi High Court has held that Look Out Circulars (LOCs) cannot be sustained merely because loans have not been repaid and no criminal case is pending against borrowers, directors, or guarantors.

"Mere inability to repay a debt, without there being a criminal case, cannot be a reason to deprive a citizen of the fundamental rights guaranteed under Article 21. The issuance of an LOC cannot be resorted to in every case of bank loan default or credit facility availed for business purposes. Where the person against whom the LOC is opened has not been arrayed as an accused in any offence for misappropriation or siphoning, the LOC cannot be sustained", the court held.

A single-judge bench of Justice Purushaindra Kumar Kaurav further held that public sector banks do not possess legal authority to seek issuance of LOCs through their Chairman, Managing Directors or Chief Executive Officers.

“Public sector banks, through their Chairman, Managing Directors, or Chief Executive Officers, do not possess legal authority to seek the opening of an LOC. Clause 6(B)(xv) of the 2021 OM (equivalent to Clause 8(b)(xv) of the 2010 OM), which conferred such power upon bank officials, stands quashed by decisions of both this Court and the Bombay High Court.”

The court was dealing with a batch of 33 writ petitions challenging LOCs issued at the instance of banks, investigating agencies, and government authorities, including several cases involving directors, promoters, and guarantors of defaulting companies.

The disputes in several petitions arose from loan defaults, insolvency proceedings, and recovery actions initiated by public sector banks.

In one matter, the account of Margdarshak Financial Services Pvt Ltd was declared fraud on November 22, 2022, after outstanding liabilities of Rs. 218.67 crores were reflected in an audit report, following which the Managing Director and Chief Executive Officer of Punjab National Bank sought issuance of an LOC against the petitioner.

In another case, Union Bank of India initiated proceedings against a company whose account had turned NPA on September 30, 2016, while CIRP and liquidation proceedings were pending before the NCLT.

Referring to precedents including Sumer Singh Salkan v. Assistant Director and Viraj Chetan Shah v. Union of India, the Court reiterated that the right to travel abroad is part of the fundamental right to personal liberty and cannot be curtailed through arbitrary executive action.

“The right to travel abroad is an integral facet of the fundamental right to life and personal liberty under Article 21 of the Constitution. Any restriction on this right must be founded on law, must follow a procedure that is just, fair, and reasonable, and must not violate any other fundamental right.”

The Court further held that the power under Clause 6(L) of the 2021 Office Memorandum permitting issuance of LOCs in cases affecting the “economic interests of India” must be interpreted narrowly.

“The power under Clause 6(L) of the 2021 OM to issue an LOC in cases detrimental to the 'economic interests of India' is to be narrowly construed and must be exercised only in rare and compelling circumstances where the proposed departure poses a clear and grave threat to the national or systemic economic interests of India, not in cases of routine commercial default or individual business failure.”

The Court also held that an LOC cannot be issued merely because a person is a director, guarantor, shareholder or family member of a defaulting borrower.

“An LOC cannot be issued against a person merely on account of his status as a director, guarantor, shareholder, or family member of a defaulting borrower, in the absence of specific material demonstrating his direct and personal role in the alleged wrongdoing. Guilt is personal and not vicarious in civil or criminal liability.”

The Court noted that the oldest petition in the batch had remained pending since December 2022 and that over 110 interim permissions to travel abroad had been granted across the matters, with no allegation that any petitioner had absconded or attempted to flee the country.

While disposing of the petitions, the court clarified that petitioners would also be at liberty to approach competent courts or originating authorities for modification or cancellation of LOCs wherever proceedings are pending.

For Petitioners: Senior Advocates Manu Sharma, Siddharth Luthra, Siddharth Aggarwal, Sanjay Dewan, Bharat Chugh and Sachit Jolly; and Advocates Prachi Darji, Abhyuday Sharma, Seema Sharma, Utkarsh Kumar, Anshay Shandilya, Mohit Chaudhary, Kunal Sachdeva, Katyayani Vajpayee, Lakshay Yadav, Anand Mishra, Sachin Midha, Aditya Vikram Bajpai, Vijay Aggarwal, Pankush Goyal, Vishal Gourav, Yash Agrawal, Siddharth Bhardwaj, Barkha Rastogi, Geetansh Bharti, Pavitra Dixit, Apurva Upmanyu, Sumeer Sodhi, Arjun Nanda, Hardeek Goyal, Gautam Khazanchi, Pratibhanu Singh Kharola, Ayush Sachan, Pooja Deepak, Khush, Vismita Diwan, Gurpreet Singh, Manit Walia, Arundhati Katju, Jaispriya Poly, Ashish Chauhan, Anvita Dwivedi, Deepank Yadav, Nirvikar Singh, Maanish Choudhary, Jai Allagh, Vikrant Suri, Sohum Dua, Ghunaim Siddiqui, Manvi, Saloni Ray, Prateek Gupta, Pulkit Agarwal, Vishakha Kaushik, Rajkamal Singh, Praveen Chaturvedi, Jyoti Chaturvedi, Tarun Kumar, Shubhendu Bhattacharyya, Shubhit Shokeen, Vartul Vishnoi, Nimish Chib, Arshdeep Singh Khurana, Neha Nagpal, Malak Bhatt, Vishvendra Tomar, Nishtha Juneja, Sulakshan VS, Himanshu Kasturi, Shivani Sharma and Vidisha Bajaj.

For Respondents: Advocates Radhika Bishwajit Dubey, Gurleen Kaur Waraich, Kritarth Upadhyay, Vivek Sharma, Amulya Dev Mishra, Rakesh Kumar, Sunil, Anupam S. Sharma, Abhiyant Singh, Vashisht Rao, Amisha P. Dash, Atul Guleria, Aryan Rakesh, Kush Sharma, Asiya Khan, Nishchay Nigam, Niharika Tanwar, Himanshu Pathak, Mohit Gupta, Nishant Gautam, Kavya Shukla, Vineet Negi, Vibhav V. Nath, Theresa, Ishkaran Singh Bhandari, Piyush Yadav, Samarendra Kumar, Vishnu Jaysaval, Priyanka Singh, Adarsh Raj Singh, Sumit Chanchal, Madhurendra Kumar, Juhi Rani, Saumya, Nitin, Nisha, Ripudaman Bhardwaj, Amit Kumar Rana, Santosh Kumar Rout, Amit Tiwari, Ayushi Srivastava, Ayush Tanwar, Arpan Narwal, Kushagra Malik, Ujjwal Tyagi, Chetanya Puri, Vidhi Gupta, Rishab Jain, Arun Aggarwal, Lovelesh Kukreja, Siddhartha Sinha, Shlok Chandra, Naincy Jain, Madhavi Shukla, Udit Dad, Jagdish Chandra Solanki, Maanya Saxena, Neeraj Kumar, Akshit Mohan, Shashwat, Nidhi Ramam, Arnav Mittal, Akshamishra and Satya Ranjan Swain for the Union of India, Bureau of Immigration, CBI, Enforcement Directorate, SFIO and the concerned banks