The Bombay High Court suppresses public sector banks’ ability to start LOCs against defaulters

Mumbai: The Bombay High Court ruled on Tuesday that the authority granted by the Central government to the chairs and managing directors of public sector banks to order the issuance of Look-Out Circulars (LOCs) against noncompliant borrowers is unconstitutional. Additionally, it annulled the LOCs that senior executives of public sector banks had initiated in accordance with authorizing Office Memoranda, which are executive instructions issued by the Center in 2010 and several times thereafter until 2019.

According to the defaulting debtors, the LOCs restricted people’s basic freedoms of personal liberty and their ability to travel without a valid legal permit. The HC concurred.
All of these LOCs were part of a group of more than 100 petitions filed in 2020 and later overturned by a division bench of Justices Gautam Patel and Madhav Jamdar for being unlawful and infringing upon basic rights, notably the freedom to travel outside.
In one of his last historic rulings, Justice Patel, who will retire on April 26, ordered that the “Bureau of Immigration will ignore and not act upon any LOCs issued by the Public Sector Banks.”

The HC ordered the Ministry of Home Affairs (MHA) or the Bureau of Immigration to make sure databases are updated, and the bench ordered that all databases be updated appropriately.
The HC stated that this does not apply to properly issued LOCs that have already been in place from courts, tribunals, or investigating agencies. The HC also emphasized that the orders of DRT or a criminal court that has issued a travel restriction order, would remain in effect and would not be impacted by the invalidation of the LOCs in the batch of petitions.
The judges also said that the banks may now file court cases to request travel limitations for any specific defaulter or, in appropriate cases, to use the Fugitive Economic Offender (FEO) Act’s provisions.
In accordance with Article 21—the basic right to liberty—the HC also said that its ruling “does not prevent the Center from now framing an appropriate law and procedure” to deal with defaulters.
Attorney General Birendra Saraf requested the annulment of the Center’s Office Memoranda (OMs), arguing that banks could not be granted executive fiat authority to restrict basic rights.
The AG and others argued that the financial interest of a public sector bank could not be equated with the economic interest of India.
The collective argument against the banks’ dominance was that they often misuse this authority in an effort to recover themselves. A person is only informed at the airport that he is unable to fly because of a letter of credit from the bank; no hearing is allowed.
The one issued on October 27, 2010, according to former ASG Anil Singh, Rui Rodrigues and Sandesh Patil, lawyers for the Center defending the OM, specifies that the originating agency has legal responsibility for the action taken by the immigration authorities in accordance with the LOC. According to the statement, the Bureau of Immigration is only an executive body carrying out Union of India border control tasks. It also said that LOCs were lawful and that the Center may create rules without needing “specific legislation.”
The Banks’ empowerment, according to the Center, is in the “public interest.”
Given the increase in instances, the Center said in October 2018 that willful defaulters or economic offenders of public financial institutions were leaving the nation after embezzling public funds or defrauding such public financial institutions. As a result, the Center issued another OM.”’
They said that it is difficult to find them after they leave Indian territory and prosecute them, that the procedure is “long drawn,” and that this causes “inordinate delays in public fund recovery.”