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Synopsis

The Delhi High Court ruled that banks cannot use Look Out Circulars to recover money and that LOCs cannot be established based only on the likelihood that a person could be named as an accused party in a criminal case since doing so would violate that person's constitutionally protected right to travel abroad.

“Banks cannot use LOCs only as a measure of recovering money because the remedy as available under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and Insolvency and Bankruptcy Code, 2016 is not sufficient and that opening of Look Out Circular will result in a faster remedy to recover money from the creditors”, the court observed.

The bench of Justice Subramonium Prasad said that LOC  is a measure to make a person surrender before investigating authorities or a court of law and can be issued only when there are sufficient reasons for it.

“The Look Out Circular can be issued only when there are sufficient reasons, and if there is a condition precedent for issuance of such Look Out Circular, it must be provided in the Look Out Circular. It is well settled that legality of a valid Look Out Circular has to be considered keeping in view the circumstances prevailing on the date on which the request for issuance of the Look Out Circular was made”, the court said.

The court was dealing with a plea by Nipun Singhal, a former director at Lloyd Electric and Engineering Limited who is facing a CBI probe over certain transactions. He sought quashing of the LOC issued at the insistence of Bank of Baroda against him. It was Singhal’s case that he came to know about the LOC when he arrived at the Mumbai airport to travel to Spain, after which he was not allowed to travel abroad.

Counsel for Singhal informed that about 18 months after he had left the company, it was declared as a non-performing asset in November 2018, and in January 2022, he received a show cause notice from Bank of Baroda about having been declared a wilful defaulter.

The court noted that as per the CBI, Singhal was not an accused in the matter and most of the transactional had taken place after his resignation. It said that Singhal was sought to be kept as a hostage in the country only for the purpose of recovery of money which is payable by the company.

The judge observed that in the present case, on the day when the LOC was issued, the petitioner was not an accused in any case and there was no material on record to show that his arrest was even contemplated.

“The petitioner's movement has been severely impeded from June, 2022 i.e., for more than one year when the petitioner is not even an accused in any FIR... A mere probability/possibility that a person might ultimately be made an accused cannot be the sole basis for opening a Look Out Circular which has the effect of impeding the movement of a citizen and which takes away its right to travel abroad which has been elevated as a fundamental right under Article 21 of the Constitution of India”, the court said in its order dated August 17.

Observing that LOC cannot be opened unless and until the conditions in the Centre's office memorandum on its issuance are satisfied, the court said that there was nothing in the present case to justify that there was any input that the departure of the petitioner was detrimental to the economic interest of India or that his departure from the country should not be permitted in the larger interest.

“Phrases like 'detriment to the economic interest of India' cannot be permitted to be used without there being any substantial material before the Look Out Circular is opened," the court said.

Case Title: Nipun Singhal v. Union of India & Ors.