Bank can't seek LOC as coercion to recover debt: HC

A bank cannot open a lookout circular (LOC) as an arm-twisting tactic to recover debt when there are no allegations of fraud or siphoning off money, the Delhi High Court has said.  The court quashed an LOC issued against the former director of a company which failed to repay the debt for which he stood guarantee, emphasising that an LOC is a major impediment for a person who wants to travel abroad.

An individual, it said, cannot be deprived of his right to go abroad other than for very compelling reasons.  “This Court is of the opinion that after resorting to all the remedies available in law, the Bank cannot open a Lookout Circular as an arm-twisting tactic to recover debt from a person who is otherwise unable to pay, more so when there are no allegations that he was engaged in any fraud or in any siphoning off or defalcation of the amounts given as loan,” said Justice Subramonium Prasad in a judgement passed on May 28.

In the present case, the court noted, no criminal proceedings were pending against the petitioner nor any allegations that he was instrumental in defalcation. The bank, it said, has already initiated steps against him as well as the company under various laws like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and the Insolvency and Bankruptcy Code.

The petitioner, who was one of the directors of the company, had stood guarantee for the Rs 69 crore credit it availed from the Union Bank of India.

He subsequently resigned from the company and joined another entity.
After the company failed to repay the debt, the bank initiated proceedings against him under various laws and also requested for opening an LOC against the petitioner.

The court said although the right to travel abroad is guaranteed under Article 21 of the Constitution of India and it cannot be taken away in an arbitrary and illegal manner, it was “now coming across a large number of cases where banks are now insisting on opening of Look Out Circulars only as a measure to recover money without initiating any criminal proceedings”.

The court said as per the Centre’s Office Memorandum, an LOC may be issued when an individual’s departure is detrimental to the sovereignty or security or integrity of India or bilateral relations or the strategic and/or economic interests of India.

However, LOCs cannot be resorted to in each and every case of bank loan default as citizens ought not to be harassed and circumstances have to reveal a higher level of gravity and a larger impact on the country, the court noted.

“Lookout Circular has been issued against the Petitioner only because of the inability of the company to repay its debts for which the Petitioner stood guarantee. There are no criminal proceedings against the Petitioner and there is no allegation that the Petitioner was instrumental in defalcation or siphoning off the money,” it said.

“In view of the above, the Lookout Circular (LOC) issued against the Petitioner is hereby quashed,” the court ordered. PTI