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[Bombay High Court] Court Criticizes Public Sector Banks' Coercive Tactics, Limits Power to Issue Look Out Circulars for Loan Defaulters in Economic Offences

Introduction

In the matter of Viraj Shah v. Union of India[i], Writ Petition (‘WP’) No. 719 of 2020, and related batch petitions, the Bombay High Court (‘BHC’) critically examined the issuance of Look Out Circulars (‘LOCs’) by the Ministry of Home Affairs (‘MHA’) to prevent individuals, reportedly in default on loans from public sector banks (‘PSBs’), from travelling overseas. These LOCs, regulated under periodically amended Office Memoranda (‘OMs’), were challenged for enabling PSBs to target loan defaulters. The BHC reviewed these amendments for their constitutionality.

Brief Facts

  • The present matter arose from a batch of WPs filed before the BHC challenging the issuance of LOCs at the behest of PSBs. For the purpose of deciding the batch petitions, the BHC decided to rely upon the facts of the petitioner in Viraj Shah v. Union of India[ii].

  • The LOCs were issued under OMs by the MHA upon requests from PSBs. The petitioners argued that the amendments to the OMs allowing PSBs to request LOCs are ultra vires a. 21 of the Constitution of India. They asserted that the said amendments were without legal authority under a. 13 of the Constitution and that executive instructions cannot infringe upon fundamental rights. Petitioners also highlighted the overlap with the Passports Act, 1967, which already governs travel restrictions.

  • PSBs, on the other hand, countered that the petitioners were significant defaulters of public funds and posed a flight risk. They argued that allowing these individuals to travel freely would impede recovery efforts and harm the economic interests of India. They asserted that defaulters cannot claim fundamental rights to avoid repayment obligations.

Held/ Observations

  • The BHC quashed all LOCs issued by PSBs and instructed the Bureau of Immigration (‘BOI’) to disregard future LOCs from PSBs. It found the inclusion of PSBs in the OMs impermissible, rendering all LOCs issued under this provision invalid. It clarified that the Fugitive Economic Offenders Act, 2018 (‘FAO’) already addressed economic offences without imposing travel bans.

  • The BHC noted that in view of the issues as discussed in the tagged petitions, relying upon the framework of OMs as explained by the Union of India (‘UOI’), the nature of OMs was made clear and was well explained by the UOI. After thoroughly examining the explanation provided by UOI, the BHC observed that even if the OMs were seen as a framework, guidelines, or protocol, they do not constitute ‘law’ as elucidated by various Hon’ble Supreme Court (‘SC’) judgements[iii] and therefore, the OMs themselves cannot directly violate the right to life and liberty guaranteed by a. 21 of the Constitution.

  • The BHC, while relying upon the decision of State of UP v Johri Mal & Ors[iv], held that LOCs issued by the PSBs are mere executive instructions which cannot hinder or disturb the fundamental rights of an individual. Such LOCs also do not meet the fairness standards set by the SC in its previous precedents; therefore, these OMs cannot be upheld or continue to be in operation. The BHC concluded that the procedure established by law under a. 21 must be fair, just, and reasonable.

  • Further, the BHC duly considered the arguments furthered by the petitioners for unequal treatment of individuals under a. 14 of the Constitution. The petitioners had also claimed that including only PSBs is a flawed classification, has no reasonable basis and violates the principle of equality under a. 14 of the Constitution. Therefore, considering these submissions and on careful observations, the BHC struck down Clause 8(b)(xv) of the 2010 OM (equivalent to Clause 6(B)(xv) of the consolidated 2021 OM) as these clauses were also found to be arbitrary in nature.

  • The BHC also pointed out that a separate law, the Fugitive Economic Offenders Act, 2018 (‘FOA’), already exists to deal with economic offenders, and it does not involve travel bans. Since this law exists, the BHC found no justification for PSB-driven LOCs to exist. As a result, the BHC cancelled all LOCs issued by PSBs and directed immigration officials, i.e., the Bureau of Immigration, to disregard such opening of LOCs. The BHC also noted that the FOA clearly defines a fugitive as someone who has already avoided prosecution by leaving India, and the FOA, therefore, does offer a path to the authorities to pursue such offenders without relying on LOCs.

  • The BHC further emphasized that this decision did not affect existing travel restrictions issued by co-ordinate Courts or the rights of the banks to use the FOA and held that the banks can still approach concerned Courts for travel bans against fugitives, borrowers, or guarantors. Finally, the BHC clarified that the UOI can still create a proper law with fair procedures for travel restrictions as long as it complies with the Constitution and does not violate the fundamental rights of the defaulters.

Our Analysis

In this landmark decision, the BHC scrutinized the routine issuance of LOCs by PSBs, highlighting the arbitrary nature of these administrative procedures and their adverse impacts on loan defaulters. Individuals affected by these consequences and the resultant embarrassment during business travels will likely welcome this ruling.

While it is true that the apprehension on the part of the banks that the defaulters might flee the country is valid, it cannot be ruled out that, in many cases, restricting their right to travel abroad also diminishes their opportunities to conduct business internationally and repay their debts. The decision in this case is, therefore, a big relief for the individuals whose defaults in loan repayment often stem from business issues beyond their control. Consequently, restricting these individuals' travel hampers their ability to engage in business activities that could facilitate loan repayment.

Further, this decision has highlighted the need to find a balance between enforcing criminal law and protecting individual liberties, including dignity and freedom of movement. While the BHC ruling is not binding on other co-ordinate High Courts of other states, it carries a persuasive value and will likely influence future and upcoming cases related to similar issues. Therefore, it remains to be seen how different High Courts will approach such similar situations and whether the petitioners and/or defaulters in other states will also be granted similar reliefs. This landmark ruling has paved the way for interesting developments in the upcoming litigation approach to be taken by the litigants regarding LOCs. The ruling may prompt legislative and executive branches to develop more balanced and constitutionally compliant mechanisms for travel restrictions related to economic offences.






End Notes

[i] 2024 SCC OnLine Bom 1195.

[ii] WP No. 719 of 2020.

[iii] Satwant Singh Sawhney v Asst Passport Officer AIR 1967 SC 1836 and Maneka Gandhi v Union of India (1978) 1 SCC 248.

[iv] (2004) 4 SCC 714.





Authored by Aishwarya Pawar, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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