Delhi High Court: Entity's Suspension Cannot Be Continued Indefinitely; Investigation Of Ex-Director Not Attributable To The Company

Delhi High Court: Entity's Suspension Cannot Be Continued Indefinitely; Investigation Of Ex-Director Not Attributable To The Company

Notes that an MSME was suspended purportedly because its ex-director was involved in the AgustaWestland VVIP helicopter scam

The Delhi High Court has held that no suspension can continue indefinitely without a show-cause notice, especially because even at the time of review, the principles of natural justice must be fulfilled.

The division bench of Justice Yogesh Khanna and Justice Tushar Rao Gedela were ruling on the suspension of business dealings with Defsys Solutions Private Limited by the Central government.

The court noted that despite being a leading defense equipment manufacturer with which the government was involved in other contracts, Defsys was suspended without adhering to the principles of natural justice, purportedly because its ex-director was involved in the AgustaWestland VVIP helicopter case.

Since the investigation was pending concerning parties unrelated to Defsys and no result was expected soon, the government was directed to comply with the impugned order of the single-judge bench under new timelines. Failure to do so would result in automatic revocation of the suspension order after a month.

The appeals were filed against the order of a single-judge bench passed in September 2023.

The single-judge bench had held that Defsys' suspension was “not within the spirit of fairness, impartial, rigor, and correctness” as contemplated in the Ministry of Defence Guidelines, 2016. However, it did not quash the suspension order, and instead, the government was directed to issue a show-cause notice and dispose of the matter after granting a hearing.

Defsys had pleaded that while directing the issuance of a fresh show-cause notice, the single-judge should have revoked the suspension order. It stated there was non-compliance with the principles of natural justice by the government, since until now, the suspension order was not served.

It pointed out that even the FIR was pending for the last 10 years, and the government was still doing business with AgustaWestland, the main accused, which was no longer under suspension.

On the other hand, the government contended that the judge had directed it to pass a reasoned order. A suspension could be indefinite, and issuance of a show-cause notice would be futile, as the defence ministry did not apply its mind to an entity's reply, as it would disclose the case of the investigating agency.

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

However, since the suspension of the prime accused-AgustaWestland was lifted before Defysys’ suspension, the bench 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 its suspension has been revoked.”

The judges stated that after the issuance of the suspension order, Defsys was issued two notices. In both, it had not been accused. The only information sought by the Central Bureau of Investigation (CBI) was regarding the names of Defsys' directors and shareholders, and foreign remittances received by them.

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

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

On the government's contention that the issuance of a show-cause notice would be futile as the MoD could not exercise application of the mind, the court ruled, “The contention of the MOD results in making it just a postman upon a mere intimation of the CBI. The respondent MOD is obliged to suspend a party without applying its mind or without even allowing the principle of natural justice to play. It is incongruent because a party that is wholly innocent and not even accused by the CBI can be punished by the MOD ad infinitum, merely because the CBI at some point in time had intimated the MOD.”

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

On the government's reasoning that the power to suspend was unconditional, the judges held, “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 the Clauses F.1 to F.3 refer to Clause D as a cause for banning. An intimation by the 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.”

Earlier, the single-judge bench had observed, “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.”

Justice Khanna and Justice Gedela stated that they found no infirmity in the impugned order. They ruled that the order of the single judge aligned with the preamble of MoD Guidelines, which the MoD violated.

The court noted that Defsys was a Micro, Small, and Medium Enterprise (MSME) supporting over 200 families of highly skilled engineers. It stated on oath that it never supplied/purchased anything from AgustaWestland. Besides, all its exports were being regulated by the government.

While observing that the one-year suspension was nearing completion and was set for review, the bench ordered compliance with the order of the single judge. However, it was subject to alterations in the timelines. The judges explained that the order was being passed due to peculiar facts of the case and a precedent could not be set.