Select Page

The Bombay High Court has said that issuance of a Look Out Circular (LOC) at the instance of public sector banks against alleged default borrowers in the absence of a statute or law is violative of a person’s fundamental rights.

The court made the observation on April 23 while quashing the Centre’s decision empowering such banks to seek issuance of LOCs. A division bench of Justices Gautam Patel and Madhav Jamdar had on April 23 held as unconstitutional the clause of an Office Memorandum issued by the Central government empowering the Chairman, Managing Directors and Chief Executive Officers of public sector banks to seek issuance of LOCs against default borrowers or even persons who stood guarantee for such borrowers.

In its 289-page judgment made available on Friday, the bench said an executive function cannot substitute a statute and the executive cannot in any event contravene the Constitution.

“For the executive to encroach upon the private rights of a citizen, there must be some specific legislation. Even if an executive action is backed by a specific legislation, it is still liable to be struck down if it involves the infringement of fundamental rights,” the bench said.

The high court said the Office Memorandums are “ex facie not law and are by no stretch of imagination a procedure established by law”. “It is inconceivable that the OMs – purely executive instructions or a framework or guidelines – can ever curtail the fundamental right to travel abroad,” it said. “Is it to be assumed or pre-supposed that just because a borrower is travelling abroad therefore, he or she is bound to settle abroad and flee the country,” the court questioned.

The bench also said it was incomprehensible as to how the chairman, managing directors and chief executive officers of public sector banks are given the power to request for issuance of LOC without any other mechanism in place.

The bench said with such powers, the public sector banks become judge and executioner at once. The court said the power given to the public sector banks to seek issuance of LOC against a defaulter is “unguided and uncanalized”. It added that under the Constitution, the exercise of executive power cannot be arbitrary, whimsical, capricious or unguided.

“There are no guidelines applied to such public sector banks. We find this particularly problematic. We have been asked simply to trust the public sector banks. We are not told whether this power to trigger a LOC can be utilized above a certain debt threshold or even for a default of a single rupee,” the HC said.

The judgment was passed on a bunch of petitions challenging the validity of the said clause and the LOCs issued by the Union Ministry of Home Affairs at the instance of public sector banks. The court while quashing the said clause said all the LOCs also stand cancelled. The bench said the OMs in general are not without authority of law, arbitrary or illegal per se.

The bench noted that an almost invariable feature is that the individual has no prior notice of the issuance of the LOC, and is not even given a copy of the LOC. She or he is merely told that there is such an LOC issued by a particular bank and the person cannot, therefore, be allowed to travel abroad. It added that there is also no provision of granting a prior hearing. The court clarified that its judgment should, however, not be misunderstood as being sympathetic towards the defaulters, and said such defaulters should not be allowed to evade their liabilities.

The bench said there are thousands and millions of borrowers, from the middle and lower income group earners, who take loans to buy flats and do not default to make the loan repayments. “They make no such excuses. Large portion of their salaries get paid out in loan repayment monthly. It is these high-volume borrowers alone who strain every nerve and explore every available legal avenue to avoid their financial obligations,” the HC said.

The Centre’s office memorandum in an amendment issued in 2018 empowered the public sector banks to issue LOCs in the “economic interest of India”. This essentially restrained a person from travelling abroad if the departure of such a person could be detrimental to the economic interest of the country.

  • Published On Apr 26, 2024 at 04:16 PM IST

Join the community of 2M+ industry professionals

Subscribe to our newsletter to get latest insights & analysis.

Download ETBFSI App

  • Get Realtime updates
  • Save your favourite articles

icon g play

icon app store

Scan to download App
bfsi barcode

Share it on social networks