Closure Of Establishments Under The Industrial Disputes Act, 1947: An Overview

Closure of establishments under the Industrial Disputes Act, 1947: An overviewⁱ

Introduction:

Article 19 (1) (g) of the Constitution of India recognizes the right of the citizens of India to, "...practice any profession, or to carry on any occupation, trade or business..." This fundamental right is, of course, subject to such reasonable restrictions as the State may, in the interests of the general public, impose in exercise of its power under Article 19 (6).

The conflict between the above right and restriction is seen, quite often, in the context of industrial undertakings which, for a variety of reasons, choose to close down and such closure is often the subject of subsequent litigation – often at the behest of the workmen of such undertaking. It is not uncommon to find challenges to the closure of an undertaking with a prayer, by the workmen, to even re-open such undertaking and reinstate them.

Could such closure be the subject of an industrial dispute? Do courts have the power to order such re-opening? This article takes a deeper examination into the fraught relationship between the right to close an undertaking and the restrictions, if any, upon such right. The article seeks to clarify, in particular, whether the right to close an undertaking is absolute in light of various judicial precedents.

1. Legislative Framework:
   
   Industrial and labour disputes are the subject of concurrent legislation in India.¹ The present article refers, ordinarily, to statutory provisions enacted by Parliament, and amendments, by the Assembly of a State, are referred to only where necessary.
   
   The closure of undertakings is regulated by the Industrial Disputes Act, 1947 (the ID Act) in the following manner:
   
   
   1. An employer having more than fifty workmen, but less than one hundred workmen, is required, in terms of Section 25-FFA² of the ID Act, to intimate, by way of a notice, the appropriate Government of the closure of its undertaking at least sixty days prior to the effective date of such closure. Such notice must contain the reasons for the intended closure of the undertaking.
      
      
   2. An employer having more than one hundred workmen is required, in terms of Section 25-O³ of the ID Act, to obtain prior permission, atleast ninety days before the date of the intended closure, from the appropriate Government. Such application must contain the reasons for the intended closure and a copy of such application must also be served simultaneously upon the workmen/ their representatives. Permission is deemed to be granted where the appropriate Government fails to communicate its order, either granting or refusing permission, within a period of sixty days from the date on which such application is made.
      
      The statutory framework can be summarized thus:
      
      
      1. Employers having less than fifty workmen are not required to either intimate or obtain permission from the appropriate Government prior to effecting the closure of an undertaking;
         
         
      2. Employers having fifty workmen or more, but less than hundred workmen, are required to intimate the appropriate Government by serving notice upon it atleast sixty days prior to the date of the intended closure;
         
         
      3. Employers having one hundred workmen or more are required to apply, atleast ninety days prior to the date of the intended closure, to the appropriate Government who must, upon receipt of such application, communicate its order either approving or rejecting such closure within a period of sixty days failing which such permission is deemed to be granted.
         
         
2. Evolution of judicial precedent:
   
   One of the earliest challenges to the closure of an undertaking, in the Indian Metal & Metallurgical Corporation⁴ case, resulted in the Madras High Court finding categorically that the underlying direction, by the Industrial Tribunal, to the effect that the employer must continue operating the business was bad in law and inconsistent with the Constitution. Subsequently, in K N Padmanabha Ayyar's⁵ case, the Madras High Court observed that any examination of the closure of an undertaking would be limited to ascertaining whether such act was to victimize the workmen and that closure, if bona fide, could not be interfered with.
   
   In Pipraich Sugar Mills Limited⁶, the Supreme Court found that it was not for the Industrial Tribunal to ascertain the motive behind the closure of a factory but only whether such closure was real and bona fide. In holding so, it found the closure of the undertaking in this instance as being bona fide, and further observed that any consequential loss of employment arising from such closure would not amount to "discharge on closure of business" resulting in retrenchment. This view was reiterated in Hariprasad Shivashankar Shukla⁷, with the Supreme Court holding, not only, that an industrial dispute could not be said to have arisen in respect of a closed undertaking, but also, that no retrenchment, in its ordinary sense, was occasioned upon such bona fide closure.
   
   Subsequently, on account of legislative intervention⁸, workmen came to be entitled to compensation upon closure of an undertaking, as though they were retrenched, regardless of the fact that such closure was beyond the control of the employer. The validity of such legislative intervention and the restrictions, upon closure, contained in Section 25-FFF of the ID Act were unsuccessfully challenged in Hatisingh Manufacturing Company Limited.⁹Accordingly, while workmen would not be entitled to the relief of reinstatement or the reopening of the undertaking, they would be entitled to compensation under Section 25-FFF as though they were retrenched.
   
   In Indian Hume Pipe Co. Ltd¹⁰, the Supreme Court narrowed the contours of a challenge to the closure of an undertaking and made it clear that the primary test in determining whether a closure was real and bona fide lay in the very fact of such closure, and not the motive behind such closure. Therefore, if, indeed, an undertaking or establishment was factually closed (and such closure was not temporary), then the Labour Court/ Industrial Tribunal could not go behind such closure to ascertain if the motive was genuine or otherwise much less order reinstatement of the workmen, or reopening of the undertaking. Workmen would, in such cases, only be entitled to compensation under Section 25-FFF¹¹.
   
   
3. 25-FFA & 25-O: Effect of non-compliance
   
   As pointed out in the Section I above, the stark difference between Sections 25-FFA & 25-O lies in the fact that the former contemplates only an intimation, of the intended closure, by the employer to the appropriate Government whereas the latter mandates that an employer obtains the appropriate Government's permission prior to effecting any closure of its undertaking.
   
   Courts have found¹² that Section 25-FFA does not amount to a condition precedent to closure and that a violation thereof would not render such closure non-est nor entitle the workmen to reinstatement. Instead, the workmen would be entitled to wages for a period of 60 days in lieu of such notice.
   
   Section 25-O, as originally enacted, was found to be unconstitutional¹³ as the appropriate Government could, without assigning any reason, reject an application made thereunder. The unconstitutional provision came to be subsequently substituted¹⁴ and Section 25-O (2) now mandates that a reasonable opportunity of hearing be provided to an employer seeking to close down an establishment.
   
   A violation of Section 25-O, on the other hand, renders the closure non-est ab initio¹⁵ and the workmen are entitled to such benefits as though no closure stands effected. It bears mentioning here that the rigour of Section 25-O is reinforced by Section 25-R of the ID Act which stipulates that a contravention of Section 25-O (1) shall be punishable with imprisonment for a term of six months, or a fine which may extend to Rupees Five Thousand, or both. A violation of Section 25-O (2) renders one liable to be imprisoned for a term which may extend to one year, or fine which may extend to Rupees Five Thousand, or both, and a further fine upto Rupees Two Thousand per day if the contravention is a continuing one.
   
   
4. Conclusion:
   
   In summary, therefore:
   1. The closure of an establishment is regulated, as applicable, by Section 25-FFA and Section-O of the ID Act;
      
      
   2. While Section 25-FFA contemplates the intimation of closure, by an employer, to the appropriate Government, sixty days before the date of such intended closure, Section 25-O mandates that an employer obtains the permission of the appropriate Government prior to closure. An employer must be heard before an order is passed on such application seeking permission. Such permission is deemed to be granted if the appropriate Government fails, within a period of sixty days from such application, to either approve or reject such application.
      
      
   3. Under Section 25-FFA, the fact of closure of an undertaking (i.e., that such closure has actually been effected) will render such closure genuine and bona fide and no industrial dispute can be said to arise in respect thereof. Courts are barred from enquiring into the motive behind such closure. The workmen can only be entitled to appropriate compensation under Section 25-FFF in such instance. Further, any violation of the notice period of sixty days, as contemplated under Section 25-FFA, could additionally entitle the workmen to wages in lieu thereof. Such violation shall not, however, have the effect of vitiating the closure itself.
      
      
   4. Closure in violation of Section 25-O of the ID Act, however, could be viewed as void ab initio and have penal consequences for the employer.

Footnotes

1. Entry 22, List III of the Seventh Schedule, Constitution of India

2. There is a State Amendment in the State of West Bengal

3. There is a State Amendment in the State of Andhra Pradesh

4. AIR 1953 Madras 98

5. 1954 1 LLJ 469

6. AIR 1957 Supreme Court 95

7. AIR 1957 Supreme Court 121

8. The Industrial Disputes (Amendment) Act, 1957 (18 of 1957).

9. 1960 SCR (3) 528

10. AIR 1968 SC 1002

11.Dal Singar & Ors v Material Movement Pvt. Ltd. 2019 (1) SCT 383 (Delhi)

12.Poonvasi & Ors v Crown Silk Weaving Industries and Ors 1994 MhLJ 847;

13.Excel Wear v Union of India 1978 (4) SCC 224

14. By Act 46 of 1982

15.S. G. Chemicals and Dyes Trading Employees Union v. S. G. Chemicals and Dyes Trading Ltd. 1986 SCC (2) 624

i. The above Article is only intended as an academic summary of the law on the above subject and ought not to be construed as legal advice. Please feel free to reach out to d.bhaskar@deepakbhaskar.com should you wish to discuss the contents of this article, or discuss any legal issues you may face.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.