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Supreme Court Of India
Reliance Energy Limited - Appellant
Versus
Maharashtra State Road Development Corporation Ltd. - Respondent
Decided On : 09/11/2007
The Supreme Court held that the decision to exclude the appellant consortium from the second stage of the bidding process for a BOT project was arbitrary and unreasonable. The court found that the consultants for the project owner had erred in rejecting the consortium's financial statements based on a misunderstanding of accounting principles and a failure to consider relevant information.
Fact of the Case:
The appellant consortium, Reliance Energy Limited (REL) and Hyundai Engineering and Construction Company Ltd. (HDEC), submitted a bid for a BOT project to construct a bridge between Mumbai and Navi Mumbai. The project owner, Maharashtra State Road Development Corporation Ltd. (MSRDC), invited bids from six applicants, including the appellant consortium. The bid documents required bidders to submit financial statements for the three most recent fiscal years. The appellant consortium submitted financial statements for HDEC for the years 2001, 2002, and 2003. However, the consultants for MSRDC rejected the consortium's bid on the ground that HDEC had not met the financial criteria specified in the bid documents. The consultants based their decision on the fact that HDEC had reported a net loss in 2001. The appellant consortium challenged the decision of the consultants, arguing that the consultants had erred in rejecting its financial statements. The appellant consortium argued that the consultants had failed to properly apply the accounting principles set forth in the bid documents and that they had failed to consider relevant information, such as the fact that HDEC had earned net profits in 2002 and 2003.
Finding of the Court:
The Supreme Court found that the consultants for MSRDC had erred in rejecting the appellant consortium's financial statements. The court found that the consultants had failed to properly apply the accounting principles set forth in the bid documents and that they had failed to consider relevant information. The court noted that the bid documents defined "net cash profit" as "PAT (profit after tax) + depreciation + amortization, not in the form of cash transaction." The court found that the consultants had erred in treating a provision for doubtful debts as a cash expense. The court also found that the consultants had erred in failing to consider the appellant consortium's audited accounts for the year 2004, which showed that HDEC had earned a net profit in that year.
Issues: Whether the consultants for MSRDC erred in rejecting the appellant consortium's financial statements.
Ratio Decidendi: The Supreme Court held that the consultants for MSRDC had erred in rejecting the appellant consortium's financial statements. The court found that the consultants had failed to properly apply the accounting principles set forth in the bid documents and that they had failed to consider relevant information. The court noted that the bid documents defined "net cash profit" as "PAT (profit after tax) + depreciation + amortization, not in the form of cash transaction." The court found that the consultants had erred in treating a provision for doubtful debts as a cash expense. The court also found that the consultants had erred in failing to consider the appellant consortium's audited accounts for the year 2004, which showed that HDEC had earned a net profit in that year.
Final Decision: The Supreme Court allowed the appeal and held that the decision to exclude the appellant consortium from the second stage of the bidding process was arbitrary and unreasonable.
JUDGMENT:
KAPADIA, J.
1. State of Maharashtra through Maharashtra State Road Development Corporation Ltd. (for short, "MSRDC") floated Global Tender for completing Mumbai Trans Harbour Link ("MTHL") between Mumbai and Navi Mumbai on BOT basis.
2. Reliance Energy Limited is a company registered under the Companies Act, 1956. It is engaged in generation, transmission and disbursement of power in Maharashtra, Delhi etc.
3. Hyundai Engineering and Construction Company Ltd. (for short, "HDEC") is a company incorporated in Korea. It is specialized in construction of bridges.
4. At this stage, it may be noted that the above Project is to be at the cost of Rs. 26000 million (Rs. 2600 crores). The bidders were required to submit RFQ Document by 10.1.2005. Under the PQ Document, M/s Jean Muller, France was appointed as consultant by MSRDC. Under the PQ Document, the bidders were required to submit financial statements of three financial years subject to the condition that the latest should not be earlier than the financial year ending 31.12.2002. REL/HDEC formed a consortium. As a consortium they were required to comply with clause 7.2.2 which stipulated net cash profit at Rs. 200 crores. The said consortium has been excluded from the second stage of bidding on the ground that it has not fulfilled the said criteria mentioned in clause 7.2.2. The consortium had submitted their RFQ Document on 9.1.2005. The said consortium had submitted three audited accounts for the financial years ending 31.12.2001, 31.12.2002 & 31.12.2003. At this stage it may be noted that the financial year for REL ended on 31st March whereas the financial year for HDEC, Korea ended on 31st December.
5. At this stage, we may quote the relevant provisions of the PQ Document which read as under: "Section 5.1 in the PQ document -The objective of the Pre-Qualification is to qualify the applicants that have the necessary experience and financial and technical capabilities to undertake the work for which the Request for Proposal is to be invited. Section 5.3.7 of the PQ document inter alia, provides: No change in, or supplementary information to an application shall be accepted after its submission. However, MSRDC reserves a right to seek additional information from the applicants, if found necessary during the course of evaluation of the applicants. Section 7.2.2 For Application by a Consortium In case of a Consortium, the entity declared as the Lead Member would be required to *hold a minimum of 26% of paid up and subscribed equity capital in the Project Company (MSRDC is of the view that a minimum paid up and subscribed capital of Rs.5000 million may be required for implementing the project.] until completion of construction and thereafter for a period of two years from the date of commencement of operations andmeet the financial eligibility criteria of Lead Member as detailed below In case of a Consortium, the following members taken together shall commit to hold majority (minimum of 51%) of the total paid up and subscribed equity capital in the Project Company until completion of construction and thereafter for a period of two years from the date of commencement of operations.* Lead Member of the consortium committing to hold a minimum of 26% of the paid up and subscribed equity capital of the Project Company, until completion of construction and thereafter for a period of two years from the date of commencement of operations and meet the financial eligibility criteria of Lead Member as given below.*Those members of the Consortium committing to hold a minimum of 5% of the paid up and subscribed equity capital of the Project Company until completion of construction and thereafter for a period of two years from the date of commencement of operations. The aggregate (taken as the arithmetic sum) of Net Cash Profit and Net Worth as explained above) of all subsidiary companies in which the respective entities hold a minimum of 51% of total paid up and subscribed equity capital w
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