Madras High Court Says Loan Defaulter Cannot Be Stopped From Travelling Abroad Without Fraud
| ➡️ Click here to Join Whatsapp News Group - Get instant updates of all Banking News |
The Madras High Court has held that a person who has defaulted on a loan cannot be forced to remain in India only to ensure repayment of the loan when there is no allegation or evidence of fraud. The court observed that taking a loan does not mean that a citizen gives up his constitutional and legal rights, including the right to travel.
Justice V. Lakshminarayanan made the observations while hearing a review petition filed by Bank of Baroda against an earlier order that had revoked a Look Out Circular (LOC) issued against a loan defaulter.
The case concerned Kondepati Ganga Prasad, who was a promoter director of an entity that had taken a loan from Vijaya Bank. Vijaya Bank was later merged with Bank of Baroda. After the loan remained unpaid, Bank of Baroda initiated proceedings under the Insolvency and Bankruptcy Code (IBC) as a financial creditor.
The National Company Law Tribunal (NCLT) subsequently approved a resolution plan, which was implemented and the debt of the principal borrower was settled. However, the LOC issued against Prasad continued.
Prasad then approached the Madras High Court seeking removal of the LOC. During the proceedings, the Central Government informed the court that the LOC had been opened based on a request made by the bank.
The bank acknowledged that the loan account had been closed following implementation of the resolution plan but wanted the LOC against Prasad to continue. The High Court, however, revoked the LOC.
Bank of Baroda subsequently filed a review petition against the order. The bank argued that although the debt of the principal borrower had been extinguished under the resolution plan, the LOC should continue because Prasad was a guarantor.
The bank also submitted that the resolution professional had advised it to initiate bankruptcy proceedings against Prasad and that the matter was being discussed with other consortium banks.
The High Court noted that the bank had not acted on the advice of the resolution professional as of the date of the hearing. No further proceedings had been initiated against Prasad. Therefore, the court said that he could not be accused of suppressing any facts.
The court also noted that the bank had not filed any complaint with the Central Bureau of Investigation (CBI) or the local police alleging that Prasad or his co-directors had committed any fraudulent activity.
In the absence of any allegation or evidence of fraud, the court held that Prasad could not be forced to remain within the country merely because he was a loan defaulter.
“When there is no fraud, either at the instance of the petitioner or at the instance of the managerial staff of the bank, for the mere fact that the petitioner is a defaulter, he cannot be forced to stay within the four corners of this country in order to ensure that the amounts are re-paid,” the court observed.
The court further said that a citizen does not surrender his constitutional and legal rights by taking a loan. It observed that taking a mortgage loan does not mean that a person has handed over all his constitutional and legal rights to the bank.
The High Court also questioned the basis for continuing the LOC merely on the basis of a letter sent by a bank to the Bureau of Immigration. It said that such a letter cannot be treated as “law” for the purpose of restricting a person’s right to travel.
The court observed that if a nationalised bank were allowed to seek such restrictions merely through a letter, private creditors and non-banking financial companies (NBFCs) could also approach the police to prevent their debtors from travelling abroad.
The court therefore found no error in its earlier decision to revoke the LOC issued against Prasad. It dismissed Bank of Baroda’s review petition and allowed the earlier order removing the LOC to stand.
The ruling makes it clear that a loan default, by itself, cannot be treated as sufficient ground to restrict a citizen’s foreign travel through a Look Out Circular when there is no allegation of fraud or other circumstances justifying such action.
- Download Court Order PDF (This PDF is available for Premium Users Only. Click here to join premium)
