06 February 2024 Banking Law >> Business & Commercial Law   |   Administrative Law >> Constitution & Law Procedure   |   Constitutional & Government >> Constitution & Law Procedure  

Facts:

In a recent judgment, the High Court of Delhi addressed the legality of a Lookout Circular (LOC) issued against a loan guarantor. The Petitioner, Ms. Shalini Khanna, had provided a personal guarantee for a loan extended by Respondent No. 2, Bank of Baroda, to Metaphor Exports Pvt. Ltd. (hereinafter referred to as "the Company"). The Company allegedly defaulted on the loan, and the Bank suspected misappropriation of funds by the company directors. Consequently, the Bank sought issuance of an LOC against Ms. Shalini Khanna.

Petitioner's Contentions:

Ms. Shalini Khanna challenged the LOC issuance, asserting the following arguments:

• Absence of Criminal Charges: She had not been implicated in any criminal proceedings related to the alleged loan default.
• Proportionality: The quantum of the defaulted loan did not constitute a significant threat to the nation's economic interests.
• Fundamental Right Infringement: The LOC infringed upon her fundamental right to travel freely enshrined under Article 21 of the Indian Constitution.

Legal Framework:

The issuance of LOCs in India is governed by Office Memoranda issued by the Ministry of Home Affairs. Notably, the 2017 Office Memorandum permits exceptional use of LOCs even in the absence of criminal charges, provided the individual's departure is deemed:

• Detrimental to the sovereignty, security, or economic interests of India.
• Likely to facilitate potential acts of terrorism or offenses against the State.

Court's Reasoning:

The Court, meticulously analyzing the aforementioned arguments and legal framework, arrived at the following conclusions:

• Limited Economic Impact: The defaulted loan amount was not substantial enough to significantly affect the Indian economy.
• Lack of Criminal Charges: Ms. Shalini Khanna had not been charged with any criminal offense concerning the loan default.
• Disproportionate Restriction: The LOC constituted an unreasonable restriction on her fundamental right to travel freely.

Court's Order:

Based on the aforementioned reasoning, the Court issued a writ of certiorari, quashing the LOC issued against Ms. Shalini Khanna. However, the Court clarified that the Bank would retain the right to seek a fresh LOC in the event Ms. Shalini Khanna is formally charged with a crime related to the loan default in the future.

Significance of the Judgment:

This judgment underscores the importance of proportionality in deploying LOCs. The Court's emphasis on the absence of criminal charges and the limited economic impact sets a precedent for future cases involving guarantors facing similar restrictions. It reinforces the principle that LOCs, while a legitimate security measure, should not be used indiscriminately or disproportionately restrict fundamental rights.

RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993    

Prevention of Corruption Act, 1988