Frontier Alloy Steels Ltd. vs Union of India (UOI) and Others

The petitioner, M/s. Frontier Alloy Steels Ltd., Kanpur, is a company, registered under the Companies Act. The petitioner is aggrieved by an order passed by the Railway Board, through its Joint Director, Railway Stores (IC), Railway Board, New Delhi, dated February 21, 2007, whereby the petitioner has been informed that the Ministry of Railways has decided to ban business dealings with the petitioner, being the sister concern of M/s. Frontier Springs Ltd., for a period of 5 years with effect from April 21, 2007.

So far as the banning of M/s. Frontier Springs Ltd., the sister concern of the petitioner is concerned, the matter is not under challenge before us, and therefore, for the purposes of the present writ petition, it is recorded that such debarment of M/s. Frontier Springs Ltd. is in accordance with law. The only issue up for consideration before us is as to whether the present petitioner, namely, Frontier Alloy Steels Ltd., which is a distinct legal entity being a separate company incorporated under the Companies Act having different board of directors/shareholders, can be debarred from dealing with Railway Board for certain mistakes committed by its sister concern or not.

Counsel for the petitioner Shri C.L. Pandey, senior advocate assisted by Shri R.P. Agarwal with reference to the constitution of the board of directors/share holders of the two companies pointed out that in the Frontier Allay Steels Ltd. there are six directors while in the case of the Frontier Springs Ltd. there are 8 directors. It is further pointed out that the two companies have been separately registered with the Ministry of Railways for the purposes of supply of commodities as per guidelines/instructions under Liaison Work Instructions (in short "ILW"). Counsel for the petitioner clarifies that even if certain mistakes have been committed by M/s. Frontier Springs Ltd. the same cannot per se justify the order of the Railway Board, to blacklist the present petitioner only because it was a sister concern, and more so, when absolutely no opportunity of hearing has been afforded to the petitioner before taking such a decision.

Shri Govind Saran, counsel for the Railways on the contrary submits that the petitioner has been debarred in view of Clause 1102 of Chapter XI of the Vigilance Manual which provides that allied firms shall also be debarred from entering into business transaction with the Railways in case the main firm is so debarred. He further points out that in the facts of the present case, if the sister concern had supplied inferior quality of commodities to the Railways, this Court may not interfere with under Article 226 of the Constitution on a petition filed by the other allied company. No opportunity of hearing was required to be granted separately to the petitioner. Shri Govind Saran states that since the board of directors of both the companies are common, therefore petitioner-company assures the desorption of allied firms under Clause 1102 read with Clause 1113.

We have heard learned Counsel for the parties and gone through the records of the case.

It is admitted on record that the petitioner-company is a separate legal entity having separate directors vis-a-vis M/s. Frontier Springs Ltd. It is also not in dispute that the petitioner is separately registered as a primary vendor in terms of ILW. It is also not in dispute that the tenders submitted by the present petitioner which had been accepted are independent of the contracts with M/s. Frontier Springs Ltd. In such circumstances, the only reason for debarring the petitioner from any business with the Railways under the impugned order for a period of 5 years can be found in the Vigilance Manual which has been referred to by counsel for the Railways. Clauses 1102 and 1113 which deal with allied firms and their debarment, are quoted herein below:

1102 (iii). Allied Firm : All concerns which come within the sphere of effective influence of the banned/suspended firms shall be treated as allied firms. In determining this, the following factors may be taken into consideration:

(a) whether the management is common;

(b) whether majority interest in the management is held by the partners or directors of the banned/suspended firm;

(c) whether substantial or majority shares are owned by the banned/suspended firm and by virtue of this it has a controlling voice.

2123. Banning:

Banning of business dealings with a firm shall be of two types :

(1) banning by one Ministry including its attached and subordinate offices.

(ii) banning by all Ministries including their attached and subordinate offices.

From the aforesaid it would be apparently clear that only allied firms which satisfy the requirements of Sub-clauses (a), (b) and (c) of Clause 1102, can be termed as allied firms and be debarred from business when main firm is so debarred. For examining the issue as to whether the petitioner-company assures the description of allied firm, it was necessary that opportunity of hearing should have been afforded to the petitioner-firm before debarring it from business with reference to Clause 1102. Even otherwise, we may record that in the impugned order the only reason for debarring the petitioner from business transaction with the railways is that it was the sister concern of M/s. Frontier Springs Ltd. Absolutely, no reference has been made to the facts which may lead to the finding that petitioner was its allied firm. Nor there is a finding that the requirements of Sub-clauses (a), (b) and (c) of Clause 1102 stand satisfied.

In such circumstances, we have no hesitation to hold that the blacklisting of the petitioner-company consequently and debarment for 5 years for business transaction with the Railways has taken place in violation of principles of natural justice, and therefore, legally not sustainable? We accordingly quash the impugned order dated February 21, 2007, to the extent the petitioner-company has been debarred from entering into business dealings with Railways for a period of 5 years. However, it shall be open to the Railways to take appropriate action against the petitioner in accordance with law as may be permissible in accordance with the principles of natural justice.

For the reasons recorded above the petition stands disposed of finally.