In a significant ruling, the Delhi High Court has emphasized that banks should not misuse Look Out Circulars (LOCs) as a means of recovering money from creditors when they perceive that the existing legal remedies are insufficient. Justice Subramonium Prasad stressed that the issuance of an LOC should be based on legitimate reasons and should not be a hasty measure.
The court noted that LOCs can only be issued under specific conditions, and these conditions must be clearly stated in the LOC itself. It emphasized that the legality of a valid LOC should be evaluated based on the circumstances prevailing at the time of its issuance
Brief Facts of the Case:
Nipun Singhal, the petitioner, had been employed with Lloyd Electric and Engineering Limited from 2010 to 2017, where he also served as a Director from 2013. His role as a Director was primarily related to dealing with the consumer durable business of the company. In 2017, the consumer durable business was sold to Havells (India) Limited, and on the same day, Singhal resigned from his position as a Director. Almost 18 months after his resignation, the company was declared a Non-Performing Asset (NPA) in November 2018.
In January 2022, Singhal received a Show Cause Notice from the Bank of Baroda, declaring him a willful defaulter. The basis for this claim was transactions that occurred after Singhal's resignation. Subsequently, the Central Bureau of Investigation (CBI) initiated an investigation against the company and its three Directors, including Singhal. Singhal cooperated with the investigation, explaining that he was not involved in the company's day-to-day affairs after his resignation.
However, when Singhal attempted to travel to Spain from the Mumbai Airport, he was informed that a Look Out Circular (LOC) had been issued against him, preventing him from leaving the country.
Contentions of the Parties:
Nipun Singhal (Petitioner): Singhal contended that the LOC issued against him was unjustified and had severely restricted his right to travel abroad. He argued that most of the transactions under scrutiny occurred after his resignation from the company. He maintained that he had cooperated with the CBI's investigation and was not an accused in any FIR. Singhal's primary contention was that the LOC had been opened to hold him, hostage, in the country for the purpose of recovering money owed by Lloyd Electric and Engineering Limited.
Bank of Baroda (Respondent No.2): The Bank of Baroda argued that Singhal, as a Director of the company, was also a key managerial personnel and had served as a whole-time Director from 2013 to 2017. They contended that since Singhal held this position, he fell under the definition of "Key Managerial Personnel" as per Section 2(1) of the Companies Act, 2013. The bank further claimed that despite the sale of the consumer durable business to Havells India Ltd, the company had engaged in suspicious transactions, including the use of fake invoices. The Bank of Baroda highlighted findings from a Forensic Audit Report conducted from 2017 to 2018, suggesting the diversion of funds during this period.
Central Bureau of Investigation (CBI) (Respondent No.3): CBI stated in court that Singhal was not currently an accused in any FIR related to the case. They did not oppose Singhal's contention and acknowledged his cooperation during their investigation.
Observations by the court:
Justice Prasad highlighted that a mere probability or possibility that an individual might eventually become an accused is not a sufficient basis for issuing a LOC. He pointed out that LOCs have a significant impact on a person's freedom to travel abroad and must not be used lightly.
The court further stated that phrases such as "detriment to the economic interest of India" should not be employed without substantial supporting evidence. It firmly asserted that banks should not resort to LOCs solely for debt recovery purposes, especially when other legal avenues like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), and the Insolvency and Bankruptcy Code, 2016 (IBC), are available.
The decision of the Court:
The Delhi High Court ultimately quashed the LOC against Singhal, deeming it unjustifiable. The court found that Singhal had been prevented from leaving the country for over a year, despite not being an accused in any criminal case related to the matter. It emphasized that the Enforcement Agency had not provided substantial evidence to warrant restricting Singhal's freedom of movement.
Case Name: Nipun Singhal Vs Union Of India & Ors
Coram: Justice Subramonium Prasad
Case No.: W.P.(C) 9841/2022 & CM APPLs. 29064/2022, 30677/2023
Advocates of the Petitioners: Mr. Nipun Singhal, Mr. Nikhil Singhvi, Mr. Bilal Ikram and Ms. Vidhi Jain, Advocates.
Advocatess of the Respondent: Mr. Anurag Ahluwalia, CGSC for R-1/UoI. Mr. Kush Sharma, Advocate for R-2/Bank of Baroda. Mr. Nikhil Goel, SPP for CBI with Mr. Kartik Kaushal and Ms. Siddhi Gupta, Advocates for R-3/CBI. Mr. Vipan Datta, Advocate for R-4
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