Yes, the Indian Government on 22nd November 2018 through the MHA circular, has empowered the CEOs of public sector banks to request look-out circulars/notice against wilful defaulters and fraudsters even before FIRs are filed against them. The recommendation had been part of the committee headed by financial services secretary Rajiv Kumar as a step towards the clean banking drive by the government.
The home ministry has also issued two circulars, authorising chairman-cum-managing directors or chief executive officers of public sector banks and the SFIO to request designated authorities to issue LOCs against any wilful defaulter or fraudster if they think the person may flee the country.
Objective as to why this move was initiated?
After the emergence of PNB fraud, the perpetrator Nirav Modi and his uncle Choksi fled the country. The Ministry had asked PSBs to collect passport details of all those borrowers, who have borrowed loans of more than Rs 50 crore.
However, possession of mere passport detail was not enough but this new circular has empowered banks to take a decisive action against wilful defaulters and fraudsters by requesting for issuance of LOC by the concerned authority, thereby thwarting any move by them to flee the country as well as ensuring that the wilful defaulters be available at all times to repay the loans.
Hence, this law will now be a deterrent for any escapes planned by the defaulters.
Who is considered as a wilful defaulter?
As per RBI Master Circular, RBI/2015-16/100 updated 01/07/2015, a willful default would be deemed to have occurred if any of the following events is noted, viz, the unit has defaulted in meeting its payment/repayment obligations to the lender-
- even when it has the capacity to honour the said obligations even when it has the capacity to honour the said obligations;;
- has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes;
- has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets; and
- has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank/lender.
The circular further stipulates that identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorized as wilful must be intentional, deliberate and calculated.
The Hon'ble Bombay High Court recently in the matter of Kailash Shahra vs IDBI Bank, taking into account the above events had held that mere default is not enough to declare a director a wilful defaulter, an intentional, deliberate act comes will only under the definition of wilful default, and lastly the borrower company, its promoter/ whole-time director can be subjected to such a declaration, but for that, there should be evidence, qua them.
Remedies if Look Out Notice has been issued
If a look out circular/notice is issued on the recommendation of the banks, the aggrieved person can approach the Hon'ble High Court by filing a writ for quashing the Look Out Notice/ Circular claiming that is has been issued illegally:-
The Hon'ble Calcutta High Court in Mritunjay Singh vs Union Of India And Others on 20 April, 2021 (Writ Petition 105 of 2020) , quashed the Look Out Notice/Circular issued against the petitioner observing that “The petitioner was not a Director of the Company at the relevant juncture when the borrower company is alleged to have committed fraud. Thus, there is no basis whatsoever for issuance of the impugned LOC and the consequential subsequent extension thereof against the petitioner.”
In view of the reasons set forth above, Writ Petition is allowed on contest, thereby quashing the Look-Out Circular and the subsequent extension thereof, issued against the writ petitioner. Respondent nos. 1 and 2 shall take immediate steps for circulation of this Order to the concerned Airport Authorities and/or other agencies which were intimated about the issuance and extension of the LOC so that no further steps are taken against the petitioner on the basis of the said Look-Out Circular as well as the subsequent extension thereof.
In alternative the applicant/petitioner can approach the Hon'ble High Court seeking permission to travel aboard for a specific purpose despite the pendency of the Look Out Notice/ Circular.
The Hon'ble Calcutta High Court Mritunjay Singh vs The Union Of India & Ors on 21 February, 2020 (WP 105 of 2020), taking into the account that the petitioner is seeking the permission to leave the country for his livelihood, as such the petitioner has fundamental right to carry on any profession of his choice, as enshrined in the Constitution of India, cannot be curtailed by preventing the petitioner from leaving the country.
However, to ensure that the petitioner will come back to face the proceedings pending against him, Hon'ble High Court allowed the petitioner to travel with a direction that the petitioner will file an undertaking to the effect that the petitioner shall be returning on or before the expiry of 5 months from the date of commencement of his voyage to India and disclosing the contact numbers of the petitioner where the petitioner would be accessible during the period of his travel.
The Hon'ble Bombay High Court in Punit Agarwal vs Reserve Bank Of India And 4 Ors on 4 March, 2020 observed that despite the pendency of the Look-Out-Notice/Circular, the petitioner is allowed to travel to US to complete his studies, subject to that the Applicant/Petitioner filing an Undertaking that he shall return to India, the applicant shall also file an Affidavit setting out the itinerary and annex therewith a copy of the air-ticket.
Though the banks have the power to open look-out-notice/circular against wilful defaulter in repayment of loans, the applicant against whom the notice/circular has been issued still have the right to approach the Hon'ble High Court within their jurisdiction to get it quashed or in alternative seek permission to travel abroad for a specific purpose, which the courts are allowing based on the genuine and bonafide grounds to travel as a matter of fundamental/ constitutional right of the applicant.
The fundamental right to travel abroad cannot be eclipsed on mere account of the absence of conclusive evidence against an individual and if the amount of loan credited to the said individual does not hamper the overall economy of the country.