Banks Can’t Use Look Out Circulars As Measure To Recover Money From Creditors: Delhi High Court

The Delhi High Court has observed that banks cannot use Look Out Circulars (LOCs) as a measure of recovering money from creditors just because they feel remedy available under law is not sufficient.

Justice Subramonium Prasad said that LOC can be issued only when there are sufficient reasons. He added that if there is a condition precedent for issuance of such LOC, the same must be provided therein.

“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.

It added that a mere probability or possibility that a person might ultimately be made an accused cannot be the sole basis for opening a LOC which has the effect of impeding the movement of a citizen and takes away the right to travel abroad.

“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 and definitely the Banks cannot use Look Out Circulars 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 (SARFAESI Act) and Insolvency and Bankruptcy Code, 2016 (IBC) 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.

Justice Prasad made the observations while quashing an LOC issued against one Nipun Singhal at the instance of Bank of Baroda. It was Singhal’s case that he came to know about the LOC when he arrived at the Mumbai airport to travel to Spain. He was not allowed to travel abroad.

He told court that the LOC was opened in relation to Lloyd Electric and Engineering Limited, a company with whom he was employed from 2010 to 2017 and was one of the Directors.

Singhal said that after about 18 months of leaving, the company was declared as Non-performing asset (NPA) in November 2018 and that he received a Show Cause Notice from the Bank of Baroda in January last year stating that he was declared a wilful defaulter.

He was later informed that a regular case was registered against the company and the three Directors of the company. It was Singhal’s case that he cooperated with the investigation and informed CBI that he resigned from the company in May 2017 and was not in any event operating as a key managerial personnel on the relevant time.

While quashing the LOC as being wholly unsustainable, the court observed that most of the transactions took place after Singhal’s resignation and that he was being sought to be “held as a hostage in the country” only for recovery of money which is payable by the company in question.

“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. The counter affidavit filed by the Ministry of Corporate Affairs also discloses the transactions barring one transaction which took place on 06.04.2017,” the court said.

Justice Prasad said that on the day when LOC was issued, Singhal was not an accused in any case and that the material on record did not even show that his arrest was even contemplated by the Enforcement Agencies. The court also recorded CBI counsel’s stand that Singhal was not an accused in the case.

“There is nothing in the present case which can justify that the Enforcement Agency has received any input that the departure of the Petitioner herein is detrimental to the economic interest of India or that his departure from the country should not be permitted in the larger interest,” the court said.

Case Title: NIPUN SINGHAL v. UNION OF INDIA & ORS

Citation: 2023 LiveLaw (Del) 809

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