Look out notice can't be issued against all loan defaulters: HC

Kochi: The Public sector banks can request the issuance of Look Out Circulars (LOC) against loan defaulters only if their failure to repay loans becomes detrimental to the interests of the nation and the public, the Kerala High Court has held.

The proceeding can’t be initiated against all the defaulters with the intention to prevent them from travelling abroad, it said.

The fact that a violation occurred in the financial agreement between the bank and its customers alone doesn’t affect the nation's economic and broader public interests. If such an interpretation is allowed, there will be a situation where a citizen’s fundamental right to liberty is curtailed to protect the financial interests of banks, the court observed.

Justice V.G. Arun delivered the verdict while allowing two separate petitions filed by Kollam native Pradeep Kumar, who stood as a guarantor for a loan taken by a Kollam-based cashew export firm, and Shinaz, owner of a cashew-processing company. Earlier, when the petitioners reached the airport to travel to Dubai, they were prevented from leaving the country by the Bureau of Immigration on the basis of the Look-Out Circulars against them. The duo moved the court, questioning the action.

An order of the Supreme Court constitutional bench makes it clear that a citizen’s right to freedom can’t be denied in any manner other than through legal means, the court observed. Also, the order by the Union Ministry makes it clear the Look-out Circular can be issued only in rare cases with sufficient reasons, it pointed out.

The banks had already initiated proceedings against the petitioners to recover outstanding dues. The immigration officials interfered based on a Look Out Circular issued by the banks, and hence the latter is legally accountable, the lawyer representing the Central Government argued. The banks argued it was possible to initiate the action against willful loan defaulters. The court, however, observed that it required issuing a special notification as per the Reserve Bank guidelines to declare that the customer defaulted in making the payment willfully. The same has not happened in this case, it pointed out.

The court made it clear that the Immigration officials acting on the basis of the Look-Out Circulars issued by banks against defaulters is not legally acceptable and that they shouldn't prevent the petitioners from travelling abroad. However, it said there is no bar for the banks in taking strict actions against loan defaulters by fully adhering to the guidelines issued by the Union Home Ministry.