Karnataka HC Protects Right to Travel: Banks Barred from Restricting Citizens over Loan Defaults

The Karnataka High Court recently ruled that a Look Out Circular (LOC) cannot be misused by banks to violate a citizen’s right to travel on account of a loan default.

The Court was dealing with a plea by the suspended director (petitioner) of a company that had defaulted on certain bank loans. The petitioner had moved the Court for relief after a LOC issued against him hindered him from travelling abroad for business purposes.

Justice M Nagaprasanna observed that the petitioner, even if it is construed to be that he is the director of the company, for setting the record straight, the travel of a citizen cannot be curtailed by the Bank on the ground that he is in default of loan amount.

The judge also referred to the Karnataka High Court’s judgment in Leena Rakesh v. Bureau of Immigration, wherein it was held that, issuance of Look Out Circular or preventing a person from travelling abroad cannot be a mode of recovery of dues to the Bank.

By way of background, the defaulter-company had taken a loan from a consortium of banks. In 2016, a dispute arose between the promoters of the company and they suffered an immense loss. As a result, the company defaulted in the repayment of bank loans. Consequently, the Banks initiated proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFEASI Act) against the company to discharge in full its outstanding liability in a sum of ₹2277.68 crores, including interest. Insolvency proceedings were also initiated against the company and personal guarantors, including the petitioner, resulting in the issuance of LOCs that restricted their ability to travel abroad. This situation ultimately obstructed the petitioner and others from conducting business activities overseas.

The Court examined whether the bank could have curtailed the fundamental right of the petitioner to travel except in accordance with the law when the company is the borrower from the bank, while the petitioner claimed to be a non-functional director. The issuance of LOC has serious repercussions, including that the petitioner would not be able to move out of the shores of the nation even if no such embargo is placed by any court of law, the Court observed. The Court also referred to Delhi High Court’s judgment in the Rana Ayyub case where the LOC against her was cancelled after observing that the personal liberty to travel cannot be taken away, except in accordance with the law.

While referring to the Madras High Court judgment in Karti P Chidambaram v Bureau of Immigration, the single judge further noted that the issue of whether a LOC can be issued against the director of a company against whom no proceedings were initiated or pending before any court of law has been settled.

The Court observed that taking recourse of Look Out Circular against a person like the petitioner, on alleged role of the petitioner in default of payment of loan by the company cannot become an impediment leading to curtailment of fundamental right of the petitioner.

The Court also noted that the petitioner was seeking permission to travel to Italy and Germany for business purposes, after which he submitted he would return to India. Consequently, the Court granted the petitioner permission to travel, on the condition that he submit an affidavit confirming his return to the country after his work abroad and within 12 weeks of his departure.

The Court’s ruling in the case of Farooq Ali Khan v. Bureau of Immigration & Ors. reaffirms that a Look Out Circular cannot be misused by banks to violate a citizen’s right to travel on account of a loan default.(alert-passed)