Calcutta High Court: Banks should refrain from issuing LOCs indiscriminately owing to limited cases of defraud

Calcutta High Court: Banks should refrain from issuing LOCs indiscriminately owing to limited cases of defraud

The bench stated that deboarding a person from a flight at the last moment was draconian and uncivilised

The Calcutta High Court has ruled that merely because a few people defrauded banks and fled from India, the banks could not use it as a uniform rationale for issuing Look Out Circulars (LOC) in an indiscriminate manner.

In the Manoj Kumar Jain vs Union of India case, the single-Judge bench of Justice Moushumi Bhattacharya said that the issuance of Look Out Circulars (LOCs) should be regulated and must not be a norm for recovery of outstanding payments.

She stated, "The extreme repercussions of issuing a Look Out Circular must hence be regulated to give it form and certainty and not be made the norm for recovery of outstanding payments to the bank. Isolated and few-and-far between cases of persons fleeing the country cannot become the uniform rationale for issuing of Look Out Circulars left, right, and centre.”

The bench added, "There is something draconian and uncivilised in a person being deboarded from an aircraft without being informed of the reason. In most cases, the person concerned is simply handed a piece of paper and told to de-plane without being made aware of the reason. This is against the principles of natural justice and fair play in action where the fundamental right to travel and the right to life is inexorably compromised and with impunity."

The court emphasised that LOCs must have the effect of restricting a person's free movement and the right to travel. It should only be issued in exceptional circumstances when the person is likely to flee the country and not repay the outstanding loan.

Justice Bhattacharya held, "LOCs cannot be issued at random and at the slightest provocation, particularly at the instance of a bank who seeks restriction on travel as a buffer to outstanding payments. The only acceptable logic - albeit with some effort - is that a person may flee the country and not return to repay his/her outstanding loan. This, however, cannot be the rule across the board and a borrower's credentials and circumstances for making payment must be considered.”

The bench was deliberating on a plea filed by Manoj Jain, the director of Jain Infra Private Limited.

Jain defaulted on a loan availed from a consortium of 11 banks. In 2022, he was disallowed to board a United Kingdom-bound flight after the Immigration Authorities informed him about a LOC pending against him, issued at the instance of the Indian Overseas Bank.

The Court noted that Jain had repaid the dues of all the banks and had also offered a One Time Settlement (OTS) plan to Andhra Bank and IDBI Bank.

The Court observed that Indian Overseas Bank had already realised Rs.86 lakh by selling a property mortgaged by the petitioner and the total value of the immovable securities given to the bank was Rs.5.45 crores.

The bench took note that the petitioner was permitted to travel 19 times by the CBI Court and there was no complaint against him that he failed to comply with the conditions imposed, and returned to India on the scheduled dates.

Stating that the bank’s argument that the petitioner was a threat to the economic interest of the country, the Court said it was far-fetched and devoid of rational basis. It added there was a recent trend of banks issuing LOCs as a recovery mechanism for outstanding monetary dues. They reason that the person may frustrate settlement of the dues by not returning to India. The logic put forth is that the person’s bona fides in repaying the dues is best ensured if the person remains within the Indian territory.

The Court added, "The banks’ apprehension may be founded on a real threat of the person leaving the country forever and the loans being written off. This reasoning, however, cannot apply across the board for all borrowers without exception. The criteria for assessing the credit-worthiness of a borrower and his/her bona fides for repayment must be determined on a case-to-case basis. The individual circumstances of a borrower’s ability and willingness to pay or the mode and manner of repayment must be assessed before the fundamental right of a person to travel is denied.”

While underscoring that the ground used against the petitioner was the economic interests of India, the Court quashed the LOC issued against the petitioner.

It maintained, "There is no evidence that the petitioner leaving the country for a specific period of time would affect that. The petitioner has not been declared fraudster or money-launderer or even an economic offender."

Advocates Sudip Deb, Riju Ghosh, Sumitava Chakraborty, Aranyak Saha and Ipsita Ghosh appeared for the petitioner.

Deputy Solicitor General Billwadal Bhattacharya, along with Advocate Narendra Prasad Gupta, represented the Central government.

Advocates Shiv Mongal Singh and Moriam Sanfui appeared for the banks.