### Public Sector Banks Cannot Issue Look Out Circulars Solely for Debt Recovery Without Criminal Proceedings

In brief

The question

Whether a public sector bank is justified in maintaining an LOC against a citizen solely for the recovery of dues in the absence of criminal proceedings or allegations of fraud/siphoning?

The court held

The court answered the issues in the negative, holding that there was no justification for the continuation of the LOCs.

It also directed

The High Court set aside the Look Out Circulars issued against all three petitioners.

However, the court granted the respondents the liberty to take any other appropriate legal actions for recovery in accordance with law.

The petitions were disposed of accordingly.

01Facts

The petitioners are directors, promoters, and guarantors of M/s Pomegranate Coaters Private Limited, which availed credit facilities from respondent no. 2, Bank of Baroda.

¶ 2

Due to alleged defaults in repayment, the bank initiated recovery proceedings under the SARFAESI Act, 2002, and the Recovery of Debts Due to Financial Institutions Act, 1993.

¶ 2

Simultaneously, the bank requested the opening of Look Out Circulars (LOCs) against the petitioners.

¶ 3

No FIR or criminal investigation was pending against the petitioners at the time of the hearing.

¶ 4

02Issues

i.Whether a public sector bank is justified in maintaining an LOC against a citizen solely for the recovery of dues in the absence of criminal proceedings or allegations of fraud/siphoning?

¶ 6-7

ii.Whether the petitioners’ travel restrictions fall within the ambit of being "detrimental to the economic interests of India" as defined under the Ministry of Home Affairs Guidelines?

¶ 6

03Law Applied

The court relied on the Bombay High Court decision in *Viraj Chetan Shah v. Union of India*, which struck down the power of public sector banks to issue LOCs under the 2021 MHA Guidelines as being arbitrary and unconstitutional.

¶ 5, 10

It further applied the principles from *Maneka Gandhi v. Union of India* regarding the fundamental right to travel abroad under Article 21.

¶ 13

The court applied *Prateek Chitkara v. Union of India*, which clarified that "detrimental to economic interest" requires high-gravity impact such as "squandering of public money" or "hawala transactions," rather than mere loan defaults.

¶ 14

04Reasoning

The court reasoned that while the bank has the right to recover public money through civil remedies, an LOC cannot be used as an "arm-twisting tactic" for debt recovery where there is no evidence of the subject being a flight risk or involved in criminal fraud.

¶ 13, 15

The court noted that because no FIR had been registered, there was no issue of "non-cooperation" with investigating agencies.

¶ 4

Following the precedent in *Vineet Gupta v. Bureau of Immigration*, the court observed that mere status as a personal guarantor or director does not justify the gravity of an LOC unless direct involvement in siphoning or defalcation is established.

¶ 6, 15

The court found that the bank's action, purportedly taken as a "measure of abundant caution," lacked sufficient legal material to meet the threshold of protecting the "economic interests of India."

¶ 6 / internal para 12