Page 56 - Banking Finance June 2024

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Bombay HC rules banks can't issue

Look Out Circulars against defaulters

T he Bombay High Court has said that issuance of a added that under the Constitution, the exercise of executive
Look OutCircular (LOC) at the instance of public sec-
power cannot be arbitrary, whimsical, capricious or unguided.
tor banks against alleged default borrowers in the
absence of a statute or law is violative of a person's funda- "There are no guidelines applied to such public sector banks.
We find this particularly problematic. We have been asked
mental rights. simply to trust the public sector banks. We are not told
The court made the observation on April 23 while quashing whether this power to trigger a LOC can be utilized above
the Centre's decision empowering such banks to seek issu- a certain debt threshold or even for a default of a single
ance of LOCs. A division bench of Justices Gautam Patel and rupee," the HC said.
Madhav Jamdar had on April 23 held as unconstitutional the The judgment was passed on a bunch of petitions challenging
clause of an Office Memorandum issued by the Central gov- the validity of the said clause and the LOCs issued by the Union
ernment empowering the Chairman, Managing Directors Ministry of Home Affairs at the instance of public sector banks.
and Chief Executive Officers of public sector banks to seek The court while quashing the said clause said all the LOCs also
issuance of LOCs against default borrowers or even persons stand cancelled. The bench said the OMs in general are not
who stood guarantee for such borrowers. without authority of law, arbitrary or illegal per se.
In its 289-page judgment made available on Friday, the bench The bench noted that an almost invariable feature is that
said an executive function cannot substitute a statute and the the individual has no prior notice of the issuance of the LOC,
executive cannot in any event contravene the Constitution. and is not even given a copy of the LOC. She or he is merely
"For the executive to encroach upon the private rights of a told that there is such an LOC issued by a particular bank
citizen, there must be some specific legislation. Even if an and the person cannot, therefore, be allowed to travel
executive action is backed by a specific legislation, it is still abroad. It added that there is also no provision of granting
liable to be struck down if it involves the infringement of a prior hearing. The court clarified that its judgment should,
fundamental rights," the bench said. however, not be misunderstood as being sympathetic to-
The high court said the Office Memorandums are "ex facie wards the defaulters, and said such defaulters should not
not law and are by no stretch of imagination a procedure be allowed to evade their liabilities.
established by law". "It is inconceivable that the OMs - purely The bench said there are thousands and millions of borrow-
executive instructions or a framework or guidelines - can ever ers, from the middle and lower income group earners, who
curtail the fundamental right to travel abroad," it said. "Is it take loans to buy flats and do not default to make the loan
to be assumed or pre-supposed that just because a borrower repayments. "They make no such excuses. Large portion of
is travelling abroad therefore, he or she is bound to settle their salaries get paid out in loan repayment monthly. It is
abroad and flee the country," the court questioned. these high-volume borrowers alone who strain every nerve
The bench also said it was incomprehensible as to how the and explore every available legal avenue to avoid their fi-
chairman, managing directors and chief executive officers nancial obligations," the HC said.
of public sector banks are given the power to request for The Centre's office memorandum in an amendment issued
issuance of LOC without any other mechanism in place. in 2018 empowered the public sector banks to issue LOCs in
The bench said with such powers, the public sector banks the "economic interest of India". This essentially restrained
become judge and executioner at once. The court said the a person from travelling abroad if the departure of such a
power given to the public sector banks to seek issuance of person could be detrimental to the economic interest of the
LOC against a defaulter is "unguided and uncanalized". It country. (The Economic Times)

BANKING FINANCE | JUNE | 2024 | 49