'Specific Show-Cause Notice Necessary Before Imposing Penalty' : Supreme Court Quashes Debarment and Penalty Order Issued by MP DISCOM

The Supreme Court has reiterated the requirement of a specific show-cause notice while quashing and setting aside the debarment and penalty order issued by the Madhya Pradesh Power Distribution Company (DISCOM) against a tenderee who was awarded a contract for supply of transformers by the DISCOM.

Noting that the show-cause notice issued by the respondent DISCOM was only about debarment, the bench of Justices Dinesh Maheshwari and Sanjay Kumar remarked that the action of imposing penalty without even putting the appellant to notice with respect to the same, cannot be approved.

The appellant, Isolators and Isolators, who is in the business of manufacturing and repairing of transformers, was awarded a tender by the Madhya Pradesh Madhya Kshetra Vidyut Vitran Company Limited (MPMKVVCL).

The appellant claimed that though a purchase order was issued by the respondent DISCOM for the supply of distribution transformers, the appellant received the same after a delay of 75 days. The appellant made a request to the DISCOM to modify the delivery schedule due to the delay in receipt of the purchase order

It claimed that despite making several requests to reschedule the supply, the DISCOM did not reschedule the supply, and instead imposed late supply penalties on the appellant's bills.

After the appellant could successfully supply only certain quantity of the contracted transformers, the respondent DISCOM sent a letter to the appellant, informing it regarding its decision to defer the balance deliveries of transformers. The same was followed by an order cancelling the supply of balance quantities. The appellant was subsequently issued an order debarring it from participating in future tenders of MPMKVVCL for a period of three years. The DISCOM also passed an order imposing penalty on the appellant on the rejected and unsupplied transformers.

Isolators and Isolators challenged the debarment and penalty order before the Madhya Pradesh High Court, who upheld the debarment order. The review petition filed by it was also summarily rejected by the High Court.

In the appeal filed before the Supreme Court against the decision of the High Court, it argued that though the show-cause notice issued by the respondent DISCOM was only about debarment, the latter proceeded to pass orders debarring the appellant for 3 years along with imposing penalty. Thus, it argued that the order imposing penalty was patently illegal and deserves to be set aside.

Perusing the facts of the case, the Supreme Court concluded that the debarment and penalty order cannot be upheld.

Referring to its decision in UMC Technologies Private Limited vs Food Corporation of India & Anr., (2021) 2 SCC 551, the court reckoned that the Apex Court has underscored the requirement of a specific show-cause notice.

Dealing with the penalty order issued by the DISCOM, the court remarked that the same cannot be sustained since in the relevant show-cause notice, the appellant was put to notice only with respect to the proposition of debarment, and nothing was indicated about the proposed imposition of penalty. “The action of the respondents in imposing the penalty without even putting the appellant to notice as regards this proposed action cannot be approved,” said the court.

Coming on to the second reason why the penalty order could not be sustained, court remarked that the authorities had imposed the maximum penalty on the appellant under the contract, without specifying the reason for imposing it.

“Secondly, the authority concerned has proceeded to impose the maximum of penalty to the tune of 10% of the deficit supply without specifying as to why the maximum of penalty was sought to be imposed. In this regard, the relevant factors as indicated by the appellant could not have been ignored altogether. Unfortunately, the High Court has totally omitted to consider this aspect of the grievance of the appellant,” the court said.

On the issue of the debarment order passed against the appellant, the Supreme Court observed that the appellant could not have been made solely responsible for the delay or default in supply after the respondent DISCOM had itself informed the appellant regarding the former’s decision to defer the balance deliveries of transformers, “until further instructions”. “In the length and breadth of the arguments on behalf of the respondents, it has nowhere been pointed out if such “further instructions” were ever issued to the appellant before issuance of the cancellation orders dated 19.11.2019 and 21.11.2019 as also before issuance of show-cause notice dated 26.11.2019. That being the position, we are clearly of the view that the debarment order had been issued against the appellant without due regard to the undeniable factual situation where the entire blame could not have been foisted upon or shifted towards the appellant,” said the court.

While dealing with the contention advanced by the appellant that, though both the debarment and the penalty order were challenged in the writ petition but the High Court chose to only consider the challenge with respect to the debarment order, the court remarked, “ Before concluding, we are impelled to observe that, in fact, the High Court had had the opportunity to correct the obvious errors in its order dated 23.04.2021, particularly when the review petition was placed before it for consideration because one part of the matter (concerning penalty) was not even considered and as regards other part too, the pertinent contentions of the appellant did not acquire the requisite attention of the High Court. Unfortunately, the High Court chose to dismiss the review petition without even looking into the relevant factors, including the one concerning the impact of the communication dated 18.09.2019 (deferment letter).”

The Court thus allowed the appeal and set aside the judgment and order of the Madhya Pradesh High Court, while quashing the debarment and penalty order issued by the respondent DISCOM.

Case Title: Isolators and Isolators Through Its Proprietor Mrs. Sandhya Mishra vs Madhya Pradesh Madhya Kshetra Vidyut Vitran Co. Ltd. & Anr.

Citation : 2023 LiveLaw (SC) 330

Counsel for the Appellant: T. R. B. Sivakumar

Contract Process- The Supreme Court has reiterated the requirement of a specific show-cause notice before imposing penalty. Noting that the show-cause notice issued by the Madhya Pradesh Power Distribution Company (M.P. DISCOM) was only about debarment, the court remarked that the action of imposing penalty without even putting the tenderee/ appellant to notice with respect to the same, cannot be approved.

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