Normal epithelial cells often exert anti-tumour effects against nearby oncogenic cells. In the Drosophila imaginal epithelium, clones of oncogenic cells with loss-of-function mutations in the apico-basal polarity genes scribble or discs large are actively eliminated by cell competition when surrounded by wild-type cells. Although c-Jun N-terminal kinase (JNK) signalling plays a crucial role in this cell elimination, the initial event, which occurs at the interface between normal cells and polarity-deficient cells, has not previously been identified. Here, through a genetic screen in Drosophila, we identify the ligand Sas and the receptor-type tyrosine phosphatase PTP10D as the cell-surface ligand-receptor system that drives tumour-suppressive cell competition. At the interface between the wild-type 'winner' and the polarity-deficient 'loser' clones, winner cells relocalize Sas to the lateral cell surface, whereas loser cells relocalize PTP10D there. This leads to the trans-activation of Sas-PTP10D signalling in loser cells, which restrains EGFR signalling and thereby enables elevated JNK signalling in loser cells, triggering cell elimination. In the absence of Sas-PTP10D, elevated EGFR signalling in loser cells switches the role of JNK from pro-apoptotic to pro-proliferative by inactivating the Hippo pathway, thereby driving the overgrowth of polarity-deficient cells. These findings uncover the mechanism by which normal epithelial cells recognize oncogenic polarity-deficient neighbours to drive cell competition.