Bank cannot use Look-Out Circular to recover dues from former non-executive director, Delhi High Court rules

The petitioner was a former Independent and Non-Executive Director of Birla Aircon Infrastructure Private Limited (“BAIPL”) and had resigned from its Board on 3 July 2013.

BAIPL had availed credit facilities from Respondent No. 2 bank, and its account was declared a non-performing asset on 31 March 2014.

In May 2022, the petitioner learnt that his name had been included in the list of alleged wilful defaulters without notice, supporting material, or an opportunity of hearing; he challenged that action in W.P.(C) 9211/2022, which remained pending.

On 4 June 2026, he was stopped at the Indira Gandhi International Airport while attempting to travel abroad and was informed that a Look Out Circular (“LOC”) had been issued at the bank’s request.

The bank initially stated in its counter-affidavit that the petitioner was a personal guarantor, but its counsel conceded that this was an inadvertent error and that the petitioner had never been a personal guarantor.

The bank asserted that the LOC had been issued as a preventive measure under paragraph 8(b)(xv) of the Ministry of Home Affairs Office Memorandum dated 12 October 2018.

The bank had already initiated proceedings, including under the SARFAESI Act, against BAIPL and the guarantors.

Whether the LOC issued against the petitioner at the request of the respondent bank was lawful and could be sustained merely because he had been a non-executive director of a borrower company that defaulted on its loan obligations.

Whether issuance of the LOC, in the absence of allegations of fraud, siphoning or defalcation and despite the petitioner not being a personal guarantor, unlawfully infringed his fundamental right to travel abroad under Article 21 of the Constitution.

Whether the bank could use an LOC as a preventive or coercive measure for recovery of its debt after having initiated remedies under applicable recovery laws.

The Court applied Article 21 of the Constitution, which protects the fundamental right to travel abroad and permits its restriction only through a procedure established by law that is fair, just, reasonable and non-arbitrary, as explained in Maneka Gandhi v. Union of India, (1978) 1 SCC 248.

It relied on Rajesh Kumar Mehta v. Union of India & Ors., W.P.(C) 11707/2022, which held that an LOC cannot ordinarily be issued merely to facilitate recovery of debt or as an arm-twisting measure where there are no criminal proceedings or allegations of fraud, siphoning or defalcation, particularly after the creditor has invoked remedies under the RDDB Act, SARFAESI Act or IBC.

The Court also considered paragraph 8(b)(xv) of the MHA Office Memorandum dated 12 October 2018, under which the bank claimed to have sought the LOC.

The Court found that the bank’s own pleadings contained no allegation that the petitioner had committed fraud, siphoned funds or engaged in defalcation.

Further, the bank expressly corrected its earlier assertion and admitted that the petitioner was not a personal guarantor.

The petitioner’s status as a former non-executive director, without more, did not establish a basis for restricting his constitutional right to travel.

Since the bank had already commenced SARFAESI and other appropriate proceedings against BAIPL and the actual guarantors, the LOC could not be employed as a coercive mechanism to recover the outstanding debt.

Applying the principles in Rajesh Kumar Mehta and Maneka Gandhi, the Court held that the LOC was arbitrary and disproportionate in circumstances where there was no criminality or compelling justification for restraining the petitioner’s travel.

It directed counsel appearing for the Bureau of Immigration to communicate the order to the Bureau of Immigration.

The petition was consequently disposed of in those terms.