LOC Cannot Be Sustained for Debt Recovery Without Criminal Prosecution or Evidence of Direct Wrongdoing

In brief

The question

1. Whether the Look Out Circular issued at the instance of a Public Sector Bank (SBI) is legally sustainable under Article 21 of the Constitution in the absence of a pending criminal case or flight risk.

The court held

The court allowed the petition and set aside the LOC.

It also directed

It held that mere status as a director does not justify travel restrictions in the absence of a personal role in alleged wrongdoing.

The court ordered the Petitioner to cooperate with any future investigations, provide SBI with a 7-day travel itinerary (prior to departure), and mandated that the Petitioner seek permission from a jurisdictional court only if a future chargesheet is filed.

01Facts

The Petitioner, a former director of M/s Zync Global Pvt. Ltd. (from 2012 to 2014), challenged a Look Out Circular (LOC) issued against him at the instance of Respondent No. 2, State Bank of India (SBI).

p. 2 · ¶ 2

The company defaulted on credit facilities in 2014, leading to its account being declared an NPA and subsequently 'fraud'.

p. 2 · ¶ 3

Notably, the fraud declaration was set aside by the High Court in 2023.

p. 2 · ¶ 3

During the pendency of this petition, the Petitioner traveled abroad seven times with court permission and returned on each occasion.

p. 2 · ¶ 4

No criminal proceedings or chargesheets were pending against the Petitioner at the time of the judgment.

p. 2 · ¶ 5

02Issues

i.1. Whether the Look Out Circular issued at the instance of a Public Sector Bank (SBI) is legally sustainable under Article 21 of the Constitution in the absence of a pending criminal case or flight risk.

p. 2 · ¶ 5 / p. 4 · ¶ 35-36

ii.2. Whether the Petitioner’s right to travel abroad can be restricted based on his status as a former director of a defaulting company.

p. 4 · ¶ 37

03Law Applied

The court applied the principles enshrined in Article 21 of the Constitution, establishing that the right to travel abroad is a fundamental facet of personal liberty.

p. 3 · ¶ 34

It relied heavily on the comprehensive legal framework distilled in Ritu Singhal v. Bureau of Immigration & Ors., which stipulates that LOCs are coercive measures of last resort and cannot be used as routine tools for debt recovery.

p. 3 · ¶ 6 / p. 4 · ¶ 34

Clause 6(B)(xv) of the 2021 Office Memorandum—conferring power upon Public Sector Banks to request LOCs—has been quashed by previous judicial decisions.

p. 4 · ¶ 35

The court applied the principle that liability is personal, not vicarious, and a person cannot be restrained merely for being a director of a defaulting borrower.

p. 4 · ¶ 37

04Reasoning

The court found that the LOC lacked legal justification as no cognizable offence or criminal case was pending against the Petitioner.

p. 2 · ¶ 5

Applying the Ritu Singhal principles, the court observed that SBI lacked the legal authority to seek an LOC following the quashing of the relevant executive mandate.

p. 4 · ¶ 35

The court highlighted a lack of "flight risk," noting the Petitioner had complied with all conditions during seven previous court-sanctioned trips.

p. 2 · ¶ 5

Since the recovery proceedings were already underway before the Debt Recovery Tribunal (DRT) and properties had been sold under the SARFAESI Act, the continued operation of the LOC was deemed an unreasonable restriction on personal liberty.

p. 2 · ¶ 5 / p. 5 · ¶ 38