Introduction
The Industrial Disputes Act, 1947, serves as a cornerstone in regulating employer-employee relations in India, particularly during industrial restructuring or cessation of operations. Among its key provisions is the regulation of “closure”, the permanent shutdown of an undertaking, which carries significant legal and socio-economic implications. Closure affects not just the viability of business enterprises, but also the livelihood of workmen and the stability of the labour market. Recognizing this, the Act imposes statutory obligations on employers intending to shut down operations, including procedural requirements, notice obligations, and compensation entitlements for affected workers. These safeguards are designed to strike a balance between an employer’s right to close its business and the rights of employees to secure and fair treatment in the face of job loss.
Definition of Closure
Section 2(cc) of the Industrial Disputes Act, 1947 defines closure as “the permanent closing down of a place of employment or part thereof.”
In the context of closure, the employment relationship is permanently severed. The closure cannot be limited or restricted only to financial, economic, or other considerations of a like nature. The closure has to be genuine and bona fide in its sense. The closure has to be looked into in the entire set of circumstances and not a mere pretence. Any adjudicatory authority, such as courts or tribunals, is not confined to any particular fact or set of facts or circumstances. The essence of the matter is not the intention, but the factum of closure by whatever reasons motivate, as held in the case of Kalinga Tubes Ltd. v Their Workmen AIR 1969 SC 90.
True test to be applied based on evidence is whether the closure was a device or pretence to terminate services of the workmen, or whether it was bona fide and for reasons beyond the control of the employer. Duration of closure may be short or long, but it is not decisive of the matter (General Labour Union v B.V. Chavan (1985) 1 LLJ 82). The government may grant or deny permission for a closing, even if the company is losing money on the operation.
Notice Requirements for Closure
Section 25FFA of the Act mandates a notice period for employers intending to close down an undertaking:
As per Section 25FFA(1), any employer who intends to close down an undertaking shall serve a notice in the prescribed manner, at least sixty days before the date on which the intended closure is to become effective, to the appropriate government stating clearly the reasons for the intended closure of the undertaking.
This section shall not apply to—
(a) an undertaking in which—
- Less than fifty workmen are employed, or
- Less than fifty workmen were employed on average per working day in the preceding twelve months.
(b) An undertaking set up for the construction of buildings, bridges, roads, canals, dams, or for other construction work or projects.
The appropriate government may, by order, direct that the provisions of sub-section. (1) shall not apply any undertaking for such period as may be specified in the order, if it is satisfied of the exceptional circumstances such as accident in the undertaking or death of the employer, under Section 25FFA(2).
Compensation to Workmen in Closing Down of Undertakings
Section 25FFF outlines the compensation payable to workmen when an undertaking is closed down:
1. General Entitlement to Compensation: Under Section 25FFF(1), when an undertaking is closed for any reason, every workman who has completed at least one year of continuous service is entitled to notice and compensation by Section 25F, as if they were retrenched. However, if the closure is due to unavoidable circumstances beyond the employer’s control, the compensation is capped at three months’ average pay.
An undertaking which is closed down by reason merely of —
- Financial difficulties (including financial losses); or
- Accumulation of undisputed off-stocks; or
- The expiry of the period of the lease or license granted to it; or
- In case where the undertaking is engaged in mining operations, exhaustion of the minerals in the area in which operations are carried on.
shall not be deemed to be closed down on account of unavoidable circumstances beyond the control of the employer within the meaning of the proviso to this sub-section.
2. Special Provision for Mining Undertakings: Section 25FFF(1A) provides an exception for mining operations closed due to exhaustion of minerals. This section provides for certain instances where the employer is not required to provide separate notice or compensation under Section 25F at the time of closure. Such instances include where:
- The employer provides the workman with alternative employment with effect from the date of closure at the same remuneration as he was entitled to receive, and on the same terms and conditions of service as applied to him, immediately before the closure, by such alternative employment; and
- The service of the workman has not been interrupted by such alternative employment; and
- The employer is, under the terms of such alternative employment or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by such alternative employment.
- Construction-Specific Undertakings: Section 25FFF(2) deals with undertakings established solely for construction projects like roads, bridges, dams, and buildings. If such an undertaking is closed within two years due to the completion of the project, no compensation under Section 25F is payable. However, if the project continues beyond two years, the workers become entitled to notice and compensation upon closure, as per standard provisions.
Procedure for Closing Down an Undertaking
Section 25-O of the Act, introduced by the Industrial Disputes (Amendment) Act, 1976, and further amended, sets out stringent procedures for closing down undertakings, particularly for larger establishments.
- Application and Exemption for Closure: Before closing an undertaking in an industrial establishment covered by this chapter, the employer must apply for prior permission from the appropriate Government at least 90 days in advance, clearly stating the reasons for the proposed closure. This application must also be served to the workmen’s representatives. However, this requirement does not apply to construction-based undertakings, such as those involving buildings, bridges, roads, canals, or dams.
- Government Inquiry and Deemed Approval: Upon receiving the application, the appropriate Government must conduct an inquiry, offer all parties an opportunity to be heard, and consider factors such as the validity of the employer’s reasons, public interest, and other relevant aspects. Based on these considerations, it may approve or reject the application with written reasons. If the Government fails to communicate its decision within 60 days, the closure is deemed automatically approved at the end of that period.
- Finality, Review, and Illegality of Unapproved Closures: The Government’s order (granting or rejecting closure) is binding on all parties and remains valid for one year, unless reviewed under sub-section (5). The Government may review its decision or refer the matter to a Tribunal, which must deliver its award within 30 days. If an employer closes an undertaking without applying or if the application is rejected, such closure is deemed illegal, and workers are entitled to full benefits as if the closure never occurred.
- Exceptional Circumstances and Compensation: In special cases, such as accidents or the employer’s death, the Government may exempt an undertaking from the 90-day notice requirement. When closure is approved (or deemed approved), every affected workman employed at the time of the application is entitled to compensation equivalent to 15 days’ average pay for every completed year of continuous service, including partial years beyond six months.
Judicial Scrutiny on Validity of Closure Restrictions
The restrictions imposed on the right to close a business, particularly the requirement for prior government permission, have been a subject of constitutional challenge under Article 19(1)(g) of the Constitution of India (right to carry on any occupation, trade or business).
Leading Case: M/s Orissa Textile and Steel Ltd. v. State of Orissa (2002) I LLJ 858 (SC):
In the case of M/s Orissa Textile and Steel Ltd. v. State of Orissa (1995) I LLJ 673 (Orissa), the constitutional validity of Section 25-O was challenged on the ground that the ‘right to continue business’ within the meaning of Article 19(1)(g) of the Constitution of India, includes right to close down the business and the fact that the citizen cannot exercise this right in as much as the permission of the State Government is required under Section 25-O before closing down the business, infringes the right guaranteed under Article 19(1)(g). This contention was based on the decision of the Supreme Court in Excel Wear v. Union of India (1978) II LLJ 527 (SC), but the infirmities pointed out in this case were rectified by amendment of the year 1982 (Amendment made by Act No. 46 of 1982 and enforced with effect from 21-8-1984).
The right to close a business is an integral part of the fundamental right to carry on business and is guaranteed by Article 19(1)(g) of the Constitution. The closure of the industrial undertaking is likely to hurt the interest of the working class, and therefore, the legislature enacted the provision of Section 25-O to consider the interest of the workers employed in a large industrial undertaking. The interest of labour should not be ignored, and therefore, a balance has been struck by prescribing the manner of seeking permission for closure and by providing for dealing with the said application by the competent authority and providing guidelines for the exercise of such powers.
Amended provisions of Section 25-O of Industrial Disputes Act do not violate the fundamental right guaranteed under Article 19(1)(g) of the Constitution.
In the matter before the Supreme Court, in the instant case, the constitutional validity of Section 25 as amended in 1982 was considered. This section was previously struck down as being unconstitutional in Excel Wear v. Union of India (1978) II LLJ 527 (SC). However, in Workmen of Meenakshi Mills Ltd. v. Meenakshi Mills Ltd. (1992) II LLJ 294 (SC), the constitutional validity of Section 25-O was upheld by the Supreme Court. Therefore, there had been a difference of opinion among the High Courts on the validity of Section 25-O. It was held by the Supreme Court in the present case that the amended Section 25-O was not ultra vires the Constitution, and it was saved by Article 19(6) of the Constitution on the following grounds:
- Section 25-O had been enacted to give effect to the directive principles of the Constitution and was in the interest of the general public.
- Under the amended section, the order granting or refusing permission for closure had to be in writing, and reasons were to be recorded. Even after permission to close being given, the employer had still to give notice and compensation as specified in Section 25-N. The other defect that no time limit has been fixed while refusing permission to close was now cured by sub-sections (3), (4), and (5) of amended Section 25-O.The restrictions imposed under the amended section were reasonable and in the interest of the general public. There is no substantive vice as the reason for refusal now shall be given in writing after inquiry and giving opportunity of hearing. Thus, the power of Government was quasi-judicial. Just a refusal in case of reasons being genuine is concerned; the interest of the general public or other factors might still justify refusal of permission, requiring that business be continued for some time. The phrase “in the interest of the general public” was not vague but was of a definite concept. There was no excessive delegation of power to the executive as the guidelines had been set out in Section 25-O. Section 25-O was not discriminatory between, say, a firm of lawyers and a factory or mine.
- The argument that the reasons given in Excel Wear case for striking down Section 25-O had been considered in Meenakshi Mills case, and as such, it was not open to the present Bench to reconsider those reasons, was not acceptable to the Supreme Court. It observed that it was the duty of the Court to form its own opinion about a given case instead of relying upon the gloss placed on that case by some other decision.
The Supreme Court thus affirmed that the right to close a business, while an integral part of the fundamental right to carry on business under Article 19(1)(g), is subject to reasonable restrictions in the interest of the working class and the general public. The amended Section 25-O strikes a balance by prescribing a procedure for seeking permission and providing guidelines for the exercise of such powers, ensuring that labour interests are not ignored.
Conclusion
The concept of ‘closure’ under the Industrial Disputes Act, 1947, signifies the permanent cessation of an undertaking, leading to the definitive termination of employment relationships. Unlike other forms of employment cessation, closure is characterized by its finality and is often driven by bona fide business considerations. However, the Act imposes significant regulations on this right, mandating prior notice to the government and affected workmen, and in many cases, requiring prior government permission.
The legal framework, encompassing Sections 2(cc), 25FFA, 25FFF, and 25-O, ensures that while employers retain the right to close a business, this right is not unfettered. It is balanced against the welfare of the working class and the broader public interest. The provisions for compensation to workmen upon closure, akin to retrenchment benefits, provide a crucial safety net. The constitutional validity of these restrictions, particularly the requirement for prior permission, has been rigorously tested and upheld by the Supreme Court, affirming that such regulations constitute reasonable restrictions under Article 19(6) of the Constitution. This comprehensive legal framework aims to ensure that closures, while sometimes inevitable, are conducted transparently, equitably, and with due consideration for their socio-economic impact.
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