By Vishwas Shah and Bhavna Shah
The legal conundrum which this article seeks to examine is the constitutional validity of the lookout circulars (LOCs) issued by the public sector banks against borrowers.
LOCs can be issued by various authorities which are described as originator in office memorandum of Ministry of Home Affairs.
However, this article seeks to confine its scrutiny only to LOCs issued by public sector banks.
Non-public sector banks, which are otherwise described as private banks, cannot issue LoCs under the existing mechanism.
In India, LOCs do not owe its origin to any statute rather, its genesis can be traced to a letter dated September 5, 1979 by the Ministry of Home Affairs of Government of India.
The office memorandum in context of lookout circular has been amended and altered from time to time by the Central government more particularly on 27.12.2000, 27.10.2010, 05.12.2017, 04.10.2018 and 22.02.2021.
Public sector banks have been included in the list of authorities permitted to issue LOC from October 4, 2018 only through managing director and chief executive officers.
The purpose for issuance of an LOC is to prevent an individual from leaving the country. The reasons for its issuance can be manifold like compelling individual to join the investigation or to ensure that he does not leave India when his/ her presence is required in any criminal case, or in case of terrorists and anti-national elements or when an individual leaving India may affect the economic interest of the country or it may justified in larger public interest.
Initially, LOCs were issued in context of criminal cases and penal statutes and issues affecting sovereignty of India, but with passage of time, its scope, ambit and horizon have expanded by the executive.
The request for opening LOC will be made by the originating agencies to the Bureau of Immigration. By virtue of office memorandum dated December 5, 2017, para 8 (j) was incorporated in another Office Memorandum dated October 27, 2010 which runs thus:
"In exceptional cases, LOCs can be issued even in such cases, as would not be covered by the guidelines above, whereby departure of a person from India may be declined at the request of any of the authorities mentioned in clause (b) of the above referred OM, if it appears to such authority based on inputs received that the departure of such person is detrimental to the sovereignty or security or integrity of India or that the same is detrimental to the bilateral relations with any country or to strategic and/or economic interests of India or if such person is allowed to leave, he may potentially indulge in an act of terrorism or offences against the State and/or that such departure ought not be permitted in the larger public interest at any given point of time.”
Initially, managing directors and chief executive officers of public sector banks were not authorized to make requests for opening of LOCs, but later on office memorandum dated October 4, 2018 was issued to include them too in the list of authorities who can seek LOCs.
This was done by inserting paragraph 8(j) in the office memorandum dated October 27, 2010 to enable LOCs to be issued against the persons who are fraudsters/persons who wish to take loans, willfully default/launder money and then escape to foreign jurisdictions.
The paragraph was inserted to curb such acts since such actions would not be in the economic interests of India or in the larger public interest.
The sum and substance is that in light of changes to the office memorandum permitting issuance of LOC, it can be issued by public sector banks only and not all banks and financial institutions.
If the rationale behind the same is economic interests of India, then exclusion of non- public sector banks defies logic. It is needless to state that public sector banks alone cannot be said to be the sole custodians of economic interest of India.
The seminal question for consideration is whether execution instructions like LOC can be invoked by public sector banks to restrict a borrower/ guarantor/ debtor from travelling abroad though the statutes governing the field do not specifically empower the originator like public sector banks and authorities like Debts Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) to restrict foreign travel of borrower/ debtor?
The office memorandum of LOC does not provide any rationale or logic to expand its scope to borrower of public sector banks when initially it was confined only to individuals involved in offences and penal statutes and individuals affecting sovereignty of India.
In the context of banks and financial institutions, it is important to bear in mind that laws like Recovery of Debts and Bankruptcy Code, 1993 as well as Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 and Insolvency and Bankruptcy Code, 2016 are in vogue.
On a holistic reading of the aforesaid laws, the inevitable result is that there is no provision which empowers the DRT or NCLT to restrict a borrower/ guarantor/ debtor from travelling abroad.
It was observed by the Supreme Court in Satwant Singh Sawhney’s case that the “right to visit abroad falls within the scope of personal liberty enshrined under Article 21 of the Constitution of India and that no person can be deorived of his right to travel except according with the procedure established by law.”
In Maneka Gandhi’s case, the Supreme Court observed that “no person can be deprived of his right to go abroad unless there is a law enabling the State to do so and such law contains fair, reasonable and just procedure."
Thus, an LOC is not reasonable restriction when not backed by any statutory law and LOCs issued by public sector banks violate Articles 19 and 21 of the Constitution.
The striking feature of an LOC is that it is issued to prevent an individual for travelling outside India, though such restrictions may not have been imposed by any court of law in a given case.
It is trite that what is not provided in the statute cannot be supplemented by way of execution instructions.
It is by now well settled that executive instructions cannot be described as law within meaning of Article 13(3) (a) of the Constitution .
The Act of 1993 permit either selling of mortgaged and personal assets of borrower or guarantor after intervention of authority like DRT.
Securitisation Act, 2002 permits selling of mortgaged properties by secured creditor without intervention of court and IBC provides regime of passing of resolution plan by a committee of creditors for debtor or take debtor into liquidation process, if there is no resolution plan.
Another disturbing trend with respect to LOCs in the context of public sector banks is that it is issued through originator like public sector banks and only implemented by the Bureau of Immigration.
No mechanism is provided to oversee and regulate issuance of LOC by public sector banks and once LOC is issued by originator, it can be deleted by originator only.
The role of Bureau of Immigration is only to implement and enforce it. No doubt as per the office memorandum, the power is solely reposed on the managing directors and chief executive officer of public sector banks but such power is always prone to arbitrary exercise, in absence of any appellate mechanism of scrutiny.
Initially, the LOC was to have shelf life of one year period only, unless the same was specifically renewed. However, this position has changed after office memorandum of 2021 which provides that once an LOC is opened, it remains in force, till request for deletion is made by originator.
The classification of banks by which only public sector banks are permitted to issue LOC is wholly violative of Art. 14 of the Constitution. It has no intelligible differentia and is manifestly arbitrary.
It is common knowledge that High Courts have to interfere for judicial review of LOC as no mechanism of judicial scrutiny is otherwise provided.
In a given case, it may happen that a borrower has made repayment or has settled dues with the concerned public sector bank, but LOC may not be deleted by the originating agencies due to oversight and in absence of mechanism governing it, LOC continues till it is deleted by the originator.
Further, there is no provision to intimate borrower against whom LOC is issued, and hence till the time borrower is prevented from taking the flight by Bureau of Immigration, he remains in dark about the issuance of LOC against him.
Moreover, no opportunity of hearing is provided to the borrower in the context of LOC, thereby violating the cherished principles of natural justice.
The office memorandum of LOC does not distinguish between the cases of borrowers of public sector banks and hardened criminals required in criminal investigation.
There may be cases of default simpliciter without any criminal element in borrowing from public sector bank but the office memorandum of LOC does not differentiate between the two and hence the classification is arbitrary and bad in law.
It is difficult to assess the embarrassment and loss of reputation that takes place when Bureau of Immigration offloads the individual borrower with no criminal record only at the mere request of originator i.e. public sector bank.
The office memorandum of LOC does not distinguish between cases pending adjudication before DRT and where judgement is rendered by competent DRT.
It may happen that in a pending case against borrower and guarantor before the DRT, the borrower and guarantor may not be saddled with the liability on account of bank having failed to prove its claim in accordance with the law and original application filed by bank may fail.
Such contingencies are also not taken care in the office memorandum and originator is given drastic powers to issue LOC and Bureau of Immigration has to enforce it mechanically.
In the conspectus of the circumstances, an LOC issued against borrower by public sector banks, when tested on the anvil of Articles 14, 19 and 21 of the Constitution, does not pass the muster and is ultra vires the Constitution.
It is advisable that the parliament brings in suitable legislation to lay down a statutory framework governing LOCs in the context of banking sector so that it strengthens the financial sector and economic interests of India for recovery against borrowers.