Bank Cannot Use Lookout Circular As Debt Recovery Tactic In Case Of No Allegations Of Fraud: Delhi HC

The Court was hearing a Writ Petition under Article 226 of the Constitution of India challenging a Lookout Circular which has been opened against the Petitioner at the request of Union Bank of India.

The bench of Justice Subramonium Prasad observed, “This Court is of the opinion that after resorting to all the remedies available in law, the Bank cannot open a Lookout Circular as an arm-twisting tactic to recover debt from a person who is otherwise unable to pay more so when there are no allegations that he was engaged in any fraud or any siphoning off or defalcation of the amounts given as loan.”

Brief Facts-

The Petitioner Rajesh Kumar Mehta was a Director and President of International Marketing at Sainov Spirits Private Limited. He resigned 2 days before Sainov Spirits was declared a Non-Performing Asset (NPA). His resignation was later updated on the Registrar of Companies website.

The Petitioner had guaranteed credit facilities for Sainov Spirits from the Bank. Due to the company's failure to repay the debt, the Bank initiated proceedings against both the company and the Petitioner, which are pending at the Debt Recovery Tribunal. Bank requested a Lookout Circular against the Petitioner from Union of India which was issued and is being challenged in this Writ Petition.

The Court said that it is coming across a large number of cases where banks are now insisting on opening Lookout Circulars only as a measure to recover money without initiating any criminal proceedings.

The Court noted the guidelines laid down by the Ministry of Home Affairs for the issuance of Lookout Circulars and a series of amendments that have been made to such guidelines.

The Court noted that according to the Office Memorandum in 2010 Look Out Circulars could not be opened at the instance of Banks. However, the Court noted that with the time provisions were made to empower heads of public sector banks to issue requests for opening Lookout Circulars.

The Court mentioned the Bombay HC decision in Viraj Chetan Shah v. Union of India & Anr., W.P.(C)719/2020 where according to the Court HC has quashed the Clause of Office Memorandum whereby the Chairman/Managing Director/Chief Executives of all Public Sector Banks could request for opening of an LOC.

In the present case, the Court noted that the Lookout Circular has been issued against the Petitioner only because of the inability of the company to repay its debts for which the Petitioner stood guarantee.

The Court further noted that there are no criminal proceedings against the Petitioner and there is no allegation that the Petitioner was instrumental in defalcation or siphoning off the money.

The Court said that the Bank has already initiated steps against the Petitioner and the company by taking steps under the RDDB Act, SARFAESI Act and the IBC.

The Court further said that the Lookout Circular is a major impediment for a person who wants to travel abroad.

“There is plethora of judgments which states that no person can be deprived of his right to go abroad other than for very compelling reasons.”, the Court added.

The Court mentioned the SC decision in Maneka Gandhi v Union of India, (1978) 1 SCC 248 and quoted, “Thus, no person can be deprived of his right to go abroad unless there is a law made by the State prescribing the procedure for so depriving him and the deprivation is effected strictly in accordance with such procedure.”

Accordingly, the Court quashed the Lookout Circular (LOC) issued against the Petitioner.

Finally, the Court allowed the Writ Petition.

Cause Title: Rajesh Kumar Mehta v. Union of India (Neutral Citation: 2024:DHC:4548)

Appearance: