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by sayum
09 October 2026 7:24 AM
"For a mere fact that a citizen of this Country raises a mortgage loan does not mean that he has mortgaged his constitutional and legal rights, lock, stock and barrel, with the bank." Madras High Court, in a ruling dated October 1, 2026, dismissed a review petition filed by the Bank of Baroda, holding that a Look Out Circular (LOC) cannot be maintained against a borrower or guarantor merely on account of an outstanding debt.
A single bench of Justice V. Lakshminarayanan observed that the right to travel abroad is a fundamental right under Article 21 of the Constitution of India, and executive interference through LOCs by financial institutions, absent any allegation of fraud, is legally unsustainable.
The 1st respondent, a former director of M/s. GVR Infra Projects, had sought the quashing of an LOC issued at the instance of the bank following a loan default. Although the debt had been satisfied through a resolution plan approved by the NCLT, the bank continued the LOC against the petitioner in his capacity as a guarantor. The High Court had previously directed the removal of the LOC, prompting the bank to file the present review petition.
The court was primarily tasked with determining whether the failure of a borrower to pay a debt constitutes sufficient legal grounds for the issuance and continuation of an LOC. Furthermore, the court examined whether the alleged suppression of the fact that consortium banks were considering bankruptcy proceedings against the guarantor warranted a review of the original order.
The bench firmly rejected the bank's attempt to use the review jurisdiction as an appellate tool. It noted that the points raised by the bank were not newly discovered facts but an attempt to re-litigate the matter.
Review Cannot Be An Appeal In Disguise
"It is a settled position of law that the review is not an appeal in disguise," the court held, referencing the precedent in Parison Devi v. Sitri Devi. The bench observed that the bank had failed to demonstrate any error apparent on the face of the record, as the information regarding potential bankruptcy proceedings was not material to the legality of the LOC.
Distinction Between Default And Fraud
The court emphasized that financial institutions must differentiate between a bona fide business failure and fraudulent activity. It noted that no loan is initiated with the intention of creating a loss, and the creation of "stressed asset" branches by banks acknowledges that bad debts are an inherent risk of the banking business.
No Absolute Power To Restrict Movement
The bench underscored that a bank official’s letter to the Bureau of Immigration does not constitute "law" as required under Article 21 to curtail fundamental rights. The court reasoned that if nationalized banks were permitted to restrain travel purely for debt recovery, private creditors and NBFCs would inevitably follow suit, leading to the subjugation of citizens' liberty to the interests of creditors.
Court Rejects Vicious Cycle Of Debt Recovery
"The bank says till he pays the amount, he should not be permitted to go abroad. This is a catch-22 situation. If the bank wants the money, the petitioner has to earn it. The petitioner in his wisdom has decided to go abroad to earn it," the court observed, noting that preventing a debtor from traveling often defeats the very purpose of recovery.
The Necessity Of Legally Valid Restrictions
The court clarified that the right to travel freely is a constitutional mandate, as established in Maneka Gandhi v. Union of India. Any restriction must be backed by valid legislation and demonstrated necessity, such as established fraudulent conduct or active criminal investigation, neither of which existed in the present case.
Finding no merit in the grounds urged by the bank, the court dismissed the review petition. It reiterated that a mortgage of assets does not equate to a mortgage of an individual's constitutional rights.
Date of Decision: 01 October 2026
