No Entity's Suspension Can Be Indefinitely Continued, Investigation Of Ex-Director Not Attributable To Company: Delhi High Court

The Division Bench of Justices Yogesh Khanna and Tushar Rao Gedela noted that despite being a leading defense equipment manufacturer with which the government was involved in other contracts, Defsys had been suspended without adhering to principles of natural justice, purportedly because its ex-Director was involved in the AgustaWestland VVIP Helicopter case.

Considering that the investigation was pending in relation to parties unrelated to Defsys and had no end in sight, it was directed that the government shall comply with the impugned order of the Single Bench under new timelines, and failure to do so shall result in automatic revocation of the suspension order after 1 month.

The appeals were filed against order of a Single Bench passed in September, 2023, where it was noted that Defsys' suspension was “not within the spirit of fairness, impartial, rigour and correctness” as contemplated in the Ministry of Defence (“MoD”) Guidelines, 2016. However, the suspension order was not quashed. Instead, the government was directed to issue show cause notice and dispose of the matter after granting a hearing.

Defsys pled that while directing issuance of a fresh Show Cause Notice, the suspension order ought to have been revoked by the Single Judge. Essentially, its grievance was that there was non-compliance of principles of natural justice by the government, inasmuch as it has not been served with the suspension order till date.

It highlighted that the relevant FIR is pending since last 10 years, and the government is still doing business with AgustaWestland, the main accused, which is no longer under suspension.

The government, on the other hand, was aggrieved that the Single Judge had directed it to pass a reasoned order. It contended that a suspension could be indefinite and issuance of show cause notice would be futile, as MoD could not apply its mind to an entity's reply lest it shall disclose the investigating agency's case.

Based on Clause D.2 of the MoD Guidelines, the government averred that merits of an investigation were not required to be gone into, once intimation was received by the authority regarding initiation of criminal enquiry against an entity.

Considering that the suspension of prime accused-AgustaWestland itself had been lifted before suspension of Defsys, the court observed, “There appears to be no cause whatsoever to first connect the Appellant to Augusta Westland and then seek to suspend the Appellant on the basis of the Augusta Westland case, after the suspension of Augusta Westland has been revoked.”

Further, it noted that after issuance of the suspension order, Defsys had been issued two notices. In both, it had not been accused in any way. The only information sought by CBI was regarding names of Defsys' Directors and shareholders, and foreign remittances received.

As such, the government's reliance on Clause D.2 of MoD Guidelines, which empowers an authority to suspend business dealings with an entity when intimation is received regarding enquiry against it, was disregarded.

“Defsys itself, which is the “entity” is not under an “ongoing investigation” by the CBI at the time of issuance of the suspension order. Any investigation of an ex-director cannot attribute to the company by itself.”

On the government's contention that issuance of show cause notice would be futile as MoD cannot exercise application of mind, the court said,

“…The contention of MOD results in making MOD just a postman inasmuch as, upon a mere intimation of CBI, the Respondent MOD is obliged to suspend a party without applying its mind or without even allowing principle of natural justice to play. It is incongruent because a party who is wholly innocent and not even accused by the CBI can be punished by MOD ad infinitum merely because CBI at some point in time had intimated MOD.”

Referring to Clause D.1 of MoD Guidelines, which prescribes that “full proceeding” must be initiated by competent authority before suspension is attempted in respect of causes under C.1 (a) - (f), the court added that the word “proceeding” inheres in itself a show cause notice; reply to the show cause notice, and then an order of suspension, if required.

Insofar as it was the government's case that power to suspend was unconditional, it was opined,

“This contention is patently wrong… the power to suspend under Clause D.2 does not lead to banning under Clause F... The suspension period must relate to banning, otherwise it is causeless. Neither of Clauses F.1 to F.3 refer to Clause D as a cause for banning… An intimation by CBI of a pending investigation is not a cause for banning, only a chargesheet is. There is neither a chargesheet nor any other cause mentioned in Clause C.1”

To the extent that the Single Judge had observed that, “if the show cause notice is not to be given, proper reasons ought to be recorded for justifying the same that national security concern exists and review would be conducted by the committee to determine as to whether the grounds in clauses 1(a) to (f) are made out”, the Bench found no infirmity in the impugned order. It was concluded that the Single Judge's order was in consonance with the preamble of MoD Guidelines and MoD had violated the said Guidelines.

In arriving at the conclusion, the Bench also noted that Defsys is an MSME supporting over 200 families of highly skilled engineers, and it has stated on oath that it never supplied/purchased anything from AgustaWestland. Besides, all its exports were statedly being regulated by the government of India.

Since the 1-year suspension was nearing completion and was set for review, the court ordered compliance with the Single Judge's order, subject to alterations in the timelines. Before parting with the order, it was clarified that the same was being passed in peculiar facts of the case and was not to be treated as a precedent.

Counsels for Defsys: Senior Advocates Mukul Rohatgi, Rajiv Nayyar, Sandeep Sethi and Rajshekhar Rao; Advocates Mahesh Aggarwal, Pawan Sharma, Rishi Agarwal, Maj. Nirvikar Singh, Aditya Chatterjee, Parminder Singh, Devika Mohan, Ankit Banati, Sharvan Niranjan, Tarini Khurana, Rishabh Sharma, Abhay Agnihotri, Vikram Choudhary, Riya Kumar, Sumer Dev Seth, Shreya Sethi, Harshil Wason and Vaishali Joshi

Counsels for UOI: ASG Chetan Sharma and CGSC Kirtiman Singh, with Advocates Vidhi Jain, Waize Ali Noor, Amit Gupta, R.V. Prabhat, Vinay Yadav and Vikramaditya Singh

Case Title: Defsys Solutions Private Limited v. Union of India, LPA 672/2023 (and connected matter)

Citation: 2023 LiveLaw (Del) 1249