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Journalism of Courage
The Bombay High Court has held that public sector banks (PSBs) cannot recommend or request the issuance of Look Out Circulars (LOCs) against loan defaulters and has set aside the provisions of the central government’s Office Memoranda (OM) that empowered PSBs to do so.
On April 23, a division Bench of Justice Gautam S Patel (who has since retired) and Justice Madhav J Jamdar quashed LOCs issued to restrain PSB debtors from travelling abroad, saying they are “strong-arm tactics” used to get around legal processes, and violative of fundamental rights guaranteed under Articles 14 and 21 of the Constitution.
The legal challenge
The LOCs under challenge were issued by the Bureau of Immigration of the Ministry of Home Affairs (MHA), and allowed the authorities at any port of departure to prevent a debtor to a PSB from leaving India. The LOCs were based on OMs issued by the Ministry from October 27, 2010 onward.
In September 2018, a ground was introduced to issue an LOC to restrain a person from going abroad if their departure was detrimental to the “economic interest” of the country. The following month, a new clause was introduced empowering the chairperson of the State Bank of India (SBI) and the managing director and chief executive officers of all other PSBs to request immigration authorities to issue LOCs against default borrowers.
The default borrowers included not only the borrowers but also the guarantors for repayment of loans, and the principal officers or directors of corporate entities in debt.
Petitioners’ argument
The aggrieved petitioners contested the portion of OMs that allowed PSBs to request an LOC against a “defaulting borrower”.
Senior advocate Birendra Saraf (who is now Advocate General for Maharashtra) argued that the OMs infringed upon the petitioners’ fundamental rights, including the right to life with dignity under Article 21.
The petitioners argued that the “economic interest of India” cannot be the same as “financial interests” of a PSB, and that the government’s action was a “classic case” of “improper and impermissible” classification between public sector and private banks, both of which are regulated by the Reserve Bank of India (RBI).
Centre’s submission
Senior advocate Anil Singh, who was Additional Solicitor General at the time, argued for the MHA that deprivation of life or personal liberty can be done only through procedure established by law, and the impugned circulars contained such “checks and balances”.
Singh argued that the steps were taken after a surge in the number of wilful defaulters and economic offenders, some of whom had fled the country after “usurping” public money.
What the court said
The court observed that the government had failed to show that debt had been recovered because the person had been denied permission to travel abroad. “…The LOCs boil down to nothing but a strong-arm tactic to bypass or leapfrog what public sector banks clearly see as inconveniences and irritants — the courts of law,” it said. (Viraj Chetan Shah v Union Of India & Anr)
The court held that the fundamental right to travel abroad cannot be curtailed by executive action without any government statute or controlling statutory provision:
“The fact that the public sector bank is directly concerned with the recovery of debt and is yet armed with this unilateral power only makes matters worse… The right to Article 21 cannot be abrogated in this fashion. Here, the public sector bank becomes judge and executioner at once.
“…In effect, the Chairpersons, MDs and CEOs have been elevated to the same status as high-ranking police officers. This is simply incomprehensible,” the court said.
The court noted that except SBI, there is no PSB among India’s top five banking companies. It noted that “If a borrower arranges its or her or his affairs so that the dealings are only with non-public sector banks, no LOC can ever be issued against the borrower… But if there is even one public sector bank, then there is a risk of an LOC being issued.”
It is not that only PSBs were affected, the court said. The entities that Nirav Modi and Vijay Mallya, whom the Centre had mentioned in its written submissions, controlled “also had exposure to other banks”, it said. The court disagreed with the “wholly artificial distinction between those who borrow from one or more public sector banks and those who borrow only from private sector banks”.
Thus, the “inclusion of only PSBs is ultra vires Article 14 as being an impermissible and invalid classification, and being manifestly arbitrary”, the court held.
What happens now
The court clarified that its order would not affect any existing restraint order issued by a competent authority, court, Debt Recovery Tribunal, or investigative or enforcement agency. “The invalidation of the present LOCs cannot and will not affect such orders,” it said.
The court said banks were “always at liberty” to apply to any court or tribunal for an order against an individual borrower, guarantor, or indebted person, restraining them from travelling overseas. Banks can also invoke their powers under the Fugitive Economic Offenders Act, 2018, where applicable.
The Bench turned down the Centre’s request to stay the operation of the verdict, but the Centre has the option of challenging the judgment in the Supreme Court.
The HC also clarified that its judgment will not prevent the central government from framing an appropriate law and establishing procedure consistent with Article 21 of the Constitution.
