Defence Ministry Cannot Suspend An Entity Indefinitely Without Adhering To Safeguards For Banning Under Guidelines On Business Dealings: Delhi HC

The Delhi High Court has observed that indefinite suspension of an entity under the Union Ministry of Defence’s 2016 guidelines for penalties in business dealing, without resort to the safeguards prescribed for banning, would not be permissible.

The guidelines were issued on November 21, 2016. They provide for suspension and debarment of suppliers for violation of defense procurement processes.

Justice Prathiba M Singh said that the suspension is a subset or species within debarment or banning and not an independent measure and that suspension cannot be read in isolation but has to be read as a part of the banning process.

“It is clear from the aforementioned discussion that the provisions of the MoD Guidelines, especially provisions related to suspension and the period and procedure for the same are ambiguous and vague. This court is of the opinion that the MoD Guidelines would have to be read in a manner that is holistic and part of a complete scheme,” the court said.

It added that the procedural safeguards i.e. recourse to principles of natural justice provided in the guidelines in case of debarment or banning would also be applicable to suspension.

“Accordingly, if any entity is suspended, a review within months has to be done and it is expected that the authorities shall ordinarily issue a show-cause notice setting out the grounds for which suspension has been resorted to and make out the grounds which would lead to a ban on the entity. In this process, the show-cause notice has to consist of the grounds which could be any of the grounds contained in Clause C1 (a) to (f),” the court said.

It added: “While there can be no doubt that in the area of defence procurement due to security considerations the discretion with the Competent Authority has to be wider and broader, the same cannot be untrammelled. There has to be a semblance of fairness, non-arbitrariness and compliance of principles of natural justice even in such cases and the Guidelines would have to be read as such.”

Furthermore, Justice Singh added that a reply would have to be sought and after properly considering the same, a reasoned order shall have to be passed. “Further, the period of suspension and banning cannot be indefinite, unless in exceptional circumstances,” the court said.

Justice Singh made the observations while dealing with a plea moved by an entity Defsys Solutions Pvt. Ltd. challenging an order passed by the Union Ministry of Defence suspending it from any business dealings with the Union Government for one year or until further orders. The petitioner entity was engaged in the business of designing, manufacturing, and integration of complicated electronic electro-mechanical, electro-optical and RF systems.

The decision for suspension was taken after the Ministry of Defence received an intimation from the Central Bureau of Investigation regarding the ongoing investigation against the entity in relation to the AugustaWestland VVIP Helicopter case.

Justice Singh set out the procedure to be followed by the Competent Authority while suspending an entity as per the guidelines.

The court said that if any entity is found allegedly violative of any of the grounds set out in clause C.1 (a) to (f) of the guidelines (corrupt practices, illegal activities, breach of clauses in the contract, national security, public interest and erring entities), the competent authority can immediately suspend dealings with such an entity.

It added that where any intimation or complaint is received from CBI or any other investigating agency that a criminal investigation has been initiated, or if the competent authority refers any complaint against the entity to such agency, or when intimation is received regarding initiation of criminal investigation or enquiry against any entity, dealings can be suspended immediately.

“In case of suspension, the same has to be compulsorily reviewed every 6 months. For the said purpose, the nature of investigation ought to be examined and if the same has a nexus with the nature of the relationship i.e., it relates to the business of the entity, between the Government and the entity/person, ordinarily a show-cause notice ought to be issued to the suspended entity within a reasonable period after suspension orders are issued, preferably within the 6 months period,” the court said.

Furthermore, Justice Singh said that a reply ought to be sought from the concerned entity or person in terms of paragraph 24 of the “Procedure for Penal Action” in the guidelines.

The court observed that a suspension cannot be for an indefinite period. It added that after the initial period of suspension and any reasonable periods of extension, if the same is to be extended for a longer period, the procedure prescribed for banning would have to be resorted to.

“If the competent authority decides to ban the entity/person, after following the prescribed procedure, the period of ban has to be then fixed bearing in mind the period of suspension already undergone which would be subsumed in the banning period,” Justice Singh said.

On merits, the court said that till date, there is no clarity as to the nature of allegations or investigation and since when such probe has been continuing against the petitioner entity, as no reasons were spelt out in the impugned order.

“If it is presumed that the investigation against the Petitioner started in 2013, along with the investigation against Agusta Westland, it is not clear as to why the CBI gave an intimation to the Respondent No.1 for the first time only in December, 2021 i.e., 9 years after inception of the Agusta Westland investigation,” the court said.

Justice Singh disposed of the plea and ordered that a show cause notice shall be issued to the petitioner entity within two weeks, setting out the reasons for suspension.

“Any relevant material in respect of allegations against the Petitioner shall be put to the Petitioner along with the show cause notice. An opportunity to reply shall be afforded to the Petitioner and if a hearing is sought, the same shall be granted. After affording a hearing, a reasoned order shall be passed within 3 months,” the court said.

Case Title: DEFSYS SOLUTIONS PRIVATE LIMITED v. UNION OF INDIA & ANR

Citation: 2023 LiveLaw (Del) 802

Click Here To Read Order