High Court Upholds Debtors' Right to Travel | 01 May 2024

Source: IE

Why in News?

The Bombay High Court ruled that public sector banks (PSBs) cannot request Look Out Circulars (LOCs) against loan defaulters.

• The court set aside the central government’s Office Memoranda (OM) empowering PSBs to do so. The court stated that these tactics violate fundamental rights guaranteed under the Constitution.

Why did the High Court Rule Against Banks Restricting Debtors' Travel?

• Legal Challenge:
  • LOCs were issued by the Bureau of Immigration of the Ministry of Home Affairs (MHA) based on Office Memoranda (OM) from 27th October 2010.
  • In September 2018, amendments to the OM were introduced, authorising the issuance of a LOC to prevent individuals from travelling abroad if their departure was harmful to the country's "economic interest".
    • It empowered PSB officials (managing director and chief executive officers) to request immigration authorities to issue LOCs against default borrowers.
    • The default borrowers included not only the borrowers but also the guarantors for repayment of loans, and the principal officers or directors of corporate entities in debt.
• Petitioners’ Argument:
  • Petitioners contended that the OMs infringed upon fundamental rights, including the right to life with dignity under Article 21.
  • They argued that the government created an improper classification between public and private banks, regulated by the Reserve Bank of India (RBI).
  • Petitioners argued that the "economic interest of India" cannot be the same as the "financial interests" of a PSB.
• Centre’s Submission:
  • The MHA argued that the circulars contained necessary "checks and balances" for deprivation of life or personal liberty, as required by the established legal procedure.
• Court Stance:
  • The court referring to the case Viraj Chetan Shah v Union Of India & Anr, 2024, noted that the government failed to prove debt recovery due to the person being denied permission to travel abroad.
    • It criticised the use of LOCs as a strong-arm tactic to bypass legal proceedings, which PSBs see as inconveniences and irritants.
  • It emphasised that the fundamental right to travel abroad cannot be curtailed by executive action without a government statute.
  • The court also expressed concern that PSBs were given unilateral power in debt recovery, effectively making them judge and executioner. It found it incomprehensible that bank officials were elevated to the same status as high-ranking police officers.
  • The court found if a borrower solely deals with non-PSBs, no LOC can be issued, but even one PSB involvement poses a risk.
    • The court dismissed the differentiation between PSB and private bank borrowers as arbitrary. Considered invalid under Article 14, the court deemed the inclusion of only PSBs in the LOC provision arbitrary.
• Implications of the Verdict:
  • The ruling does not affect existing restraint orders issued by competent authorities.
  • Banks can still seek orders from courts or tribunals to restrain individuals from travelling abroad but cannot ask the centre to issue Look Out Circulars.
  • Banks can also invoke powers under the Fugitive Economic Offenders Act, of 2018 to recover the loan.
  • The judgement will not prevent the central government from framing an appropriate law consistent with Article 21 of the Constitution.

What are the Legal Rights of the Defaulters?

• The Reserve Bank of India (RBI) directed banks and finance companies to undertake compromise settlements or technical write-offs on accounts categorised as wilful defaulters or fraud.
  • Wilful offenders or companies involved in fraud will no longer face prejudice from lenders due to criminal proceedings against them.
• Borrowers who have undergone compromise settlements can apply for fresh loans after a minimum cooling period of at least 12 months.
  • Regulated banks and finance companies have the flexibility to stipulate higher cooling periods in line with their board-approved policies.
• The legal rights of defaulters in India include the right to receive a notice, fair debt collection practices, grievance redressal, seek legal assistance, and fair credit reporting.