The Kerala High Court has reaffirmed a foundational principle of administrative law: disciplinary actions against government employees must strictly adhere to prescribed Service Rules, and cannot be circumvented by executive circulars. This judgment invalidates penalty orders issued under internal circulars that authorized recovery of alleged losses from employees, setting a critical precedent for public sector employment disputes.
Background & Facts
The Dispute
The petitioners, nine permanent employees of the Kerala State Beverages (Manufacturing and Marketing) Corporation Limited (KSBC), were subjected to a penalty order dated 06.02.2018 (Ext.P2) for allegedly obstructing the sale of customer-demanded liquor brands and promoting others to boost sales. The penalty was imposed under two circulars issued by the Managing Director of KSBC - Circular No. KSBC/IA/PENALTY/2016-2017 dated 10.06.2016 (Ext.P3) and Circular No. MD/KSBC/IA/PENALTY/2015-2016/345 dated 15.02.2016 (Ext.P4). These circulars purported to empower the Corporation to recover financial losses from employees’ salaries without following formal disciplinary procedures under the Service Rules.
Key Facts
- The petitioners were stationed at FL-1-2024 Retail Outlet, Valakom, Kottarakkara
- Three decoy inspections were conducted on 29.01.2018 (Ext.P1), alleging suppression of sales of demanded brands
- Based on these inspections, Ext.P2 penalty order was issued on 06.02.2018, imposing financial deductions
- The petitioners submitted a representation (Ext.P5) on 19.02.2018, which was ignored
- The circulars (Ext.P3 and Ext.P4) allowed recovery of losses without notice, hearing, or opportunity to defend
- No formal charge sheet, inquiry, or disciplinary committee proceedings were initiated
Procedural History
- 29.01.2018: Decoy inspection conducted by KSBC audit team
- 06.02.2018: Penalty order (Ext.P2) issued against petitioners under Ext.P3 and Ext.P4 circulars
- 19.02.2018: Petitioners submitted representation (Ext.P5) challenging the penalty
- 09.06.2018: Writ Petition (WP(C) No. 7508 of 2018) filed before the Kerala High Court
- 09.06.2026: Final hearing and judgment delivered
The Parties' Positions
Petitioners: Argued that the circulars violated the Kerala State Beverages (Manufacturing and Marketing) Corporation Limited Service Rules, which mandate a full disciplinary process including charge sheet, inquiry, and right to defense before any penalty can be imposed. They relied on the precedent in Santhosh P.C. v. Kerala State Beverages (Manufacturing and Marketing) Corporation Ltd. (2024 KHC Online 7199), which had already struck down identical circulars.
Respondents (KSBC): Contended that the circulars were necessary for efficient management and recovery of losses due to employee misconduct. They argued that the circulars were administrative in nature and did not require formal rule-making.
Relief Sought
The petitioners sought quashing of Ext.P2 penalty order and the circulars Ext.P3 and Ext.P4, along with restoration of any amounts deducted and declaration that such circulars are ultra vires the Service Rules.
The Legal Issue
Can a public employer impose financial penalties on employees through administrative circulars that bypass the mandatory disciplinary procedures prescribed under statutory Service Rules?
Arguments Presented
For the Petitioner
The petitioners relied on Santhosh P.C. v. Kerala State Beverages (Manufacturing and Marketing) Corporation Ltd. (2024 KHC Online 7199), where this Court had held that the Managing Director of KSBC lacks the authority to issue circulars for recovery of losses from employees. The Service Rules provide a comprehensive, step-by-step procedure for disciplinary action, including issuance of charge sheet, holding of inquiry, and right to be heard. Circulars that permit direct deduction of wages without these safeguards violate natural justice and are ultra vires the Service Rules. The petitioners emphasized that the circulars effectively created a parallel disciplinary regime, which is impermissible under constitutional and administrative law.
For the Respondent
The respondents argued that the circulars were issued to prevent financial losses due to employee misconduct and were within the Corporation’s administrative discretion. They contended that the circulars were not punitive but corrective, and that the Service Rules were not intended to be exhaustive of all remedial measures. However, they did not cite any statutory provision empowering the Managing Director to issue such circulars.
The Court's Analysis
The Court examined the nature of the circulars and their operational effect. Ext.P3 and Ext.P4 permitted the Corporation to recover alleged losses directly from employees’ salaries without any inquiry, charge sheet, or opportunity of hearing. The Court noted that the Service Rules of KSBC contain detailed provisions for disciplinary proceedings, including the requirement of a formal inquiry before imposition of any penalty. The Court held that administrative circulars cannot override or supplement statutory Service Rules, particularly when they deprive employees of procedural safeguards guaranteed under Article 14 and Article 311 of the Constitution.
"The Managing Director has no power to issue circulars for recovery of losses or shortages from employees, as such power is not conferred by the Service Rules and cannot be inferred by implication."
The Court further observed that the judgment in Santhosh P.C. (supra) had already settled this issue, and the subsequent dismissal of Writ Appeal No. 642 of 2025 confirmed the binding nature of that precedent. The Court emphasized that procedural fairness is non-negotiable in public employment, and any attempt to circumvent it through executive fiat is unconstitutional. The penalty order (Ext.P2) was therefore directly tainted by its reliance on invalid circulars.
The Court clarified that while the circulars themselves must be set aside, this judgment does not affect disciplinary proceedings already concluded against employees who did not challenge them. The Corporation retains the right to initiate fresh proceedings under the Service Rules, provided they comply with due process.
The Verdict
The writ petition is allowed. Ext.P2 penalty order dated 06.02.2018 is set aside. Exts.P3 and P4 circulars dated 10.06.2016 and 15.02.2016 are declared invalid and set aside. The Corporation is directed to restore any amounts deducted from the petitioners’ salaries pursuant to Ext.P2 within four weeks. The Corporation may initiate fresh disciplinary proceedings against any employee in accordance with the Service Rules, provided all procedural safeguards are strictly followed.
What This Means For Similar Cases
Circulars Cannot Bypass Service Rules
- Practitioners must challenge any penalty imposed via circulars that lack statutory backing
- Any deduction of salary without a formal inquiry under Service Rules is void ab initio
- Employers cannot use circulars to create summary punishment mechanisms
Natural Justice Is Non-Negotiable in Public Employment
- Right to notice, hearing, and defense is mandatory under Article 311(2)
- Even in cases of alleged financial loss, procedural compliance cannot be waived
- Courts will not uphold administrative convenience over constitutional rights
Precedent Binding Across Similar Entities
- This judgment applies to all state-owned corporations with Service Rules
- Similar circulars issued by other state entities (e.g., electricity boards, transport corporations) are now vulnerable to challenge
- Legal notices must now cite Santhosh P.C. and this judgment as binding authority
