Excel Wear Etc vs Union Of India & Ors

Citation: 1979 AIR 25 Bench: (CJ) Chandrachud, Y.V., Sarkaria, Ranjit Singh, Untwalia, N.L., Koshal, A.D., Sen, A.P. (J)
Estimated Reading Time: 9 minutes

Facts

  1. In the present case, four writ petitions were filed challenging the constitutional validity of section 25-O and 25-R of the Industrial Disputes Act, 1947.
  2. One of the petitioners, Excel Wear is a registered partnership corporation whose members are citizens of India. The petitioner has a factory in Bombay, where he produces export clothes. Approximately 400 employees were working in the petitioner’s plant.
  3. From August 1976, the workers became very radical, hostile, aggressive, unjustifiable, indulged in illegal strikes, and the factory’s labour problems became unprecedented. In support of the above charges, several events have been reported in the Writ Petition.
  4. In May 1977, it almost became impossible for the Company to work as the violence and strikes of the workers made it hard to carry on the business, the Company served a notice on the State Government of Maharashtra, for previous approval of the intended closure of the undertaking following Section 25-O (1) of the Act. However, the State Government refused to grant the authorisation.
  5. Another petition was filed by petitioner Acme Manufacturing Co. Ltd. who was compelled to decide to close down the undertaking due to massive losses incurred by them on account of low productivity, serious labour unrest and indiscipline resulting in various incidents of assaults. The Company then applied to the State Government of Maharashtra on May 2 1977, under S. 25-O (1) of the Act for approval of the intended closure, but the State Government refused the same. 
  6. In short, one wanted the winding up of the Company because of the losses incurred due to workers violence and strikes, and the other wanted the closure because it underwent colossal failure due to low productivity. The other two petitions were also similar. 

Contentions

  • Petitioner
  1. The right to close a company is an integral part of the right to run a business granted under Article 19(1)(g) of the Constitution. The challenged legislation puts a very high constraint on the aforementioned constitutional right, unreasonably excessive and subjective. It is not a limitation, but almost a destruction or negation of the request. The restrictions imposed are obviously beyond the boundaries allowed by Art.19(6) of the Constitution.
  2. The right to pursue a business requires the right not to carry on a company which is, as any other right alluded to in Article 19(1), such as the right to freedom of expression includes the right not to talk and the right not to join an association is implicit in the right to form an association.
  3. The limitations are unreasonable because-
  1. Section 25(o) of the Industrial Dispute Act does not include a declaration of reasons in the order.
  2. No time limit shall be fixed when denying permission to close.
  3. Even though the grounds are adequate and necessary, consent may be rejected for the supposed public interest in labour welfare. Labour is bound to suffer as a result of unemployment in virtually any case of closure.
  4. Apart from the civil responsibility to be sustained according to subsection (5), the closure may be compulsive if it is brought against the way alluded to in subsection (2) that it is visited with penal implications provided for in section 25-R Industrial Dispute Act.
  5. Refusal to give permission would only mean, legally speaking, that the Company continues. Still, the plant owner cannot be required to carry on the business and continue the manufacturing process, and thus one of the goals desired to be accomplished by this clause cannot be achieved.
  6. If it is forbidden to do any business in the public interest, an individual can make another trade. However, banning the closing of an operating company is the destruction of the right to close.
  7. The practicability of the impugned restrictions must be examined both from the procedural aspect and substantive aspects of the law. Subsection (2) of 25 D, Industrial Dispute Act would not make it necessary for any higher government body to take a vote.
  • Respondent
  1. The respondent’s counsel did not argue that the right to close a company was an essential part of the right to run a business. However, they argued that the limitations imposed by the challenged legislation were very rational and justified to bring an end to unfair labour conditions and the health of workers. It is a radical piece of law to protect a weaker segment of society.
  2. However, counsel for the other respondents disagreed that the freedom to close a company was an integral part of the right to perform any business. According to them, the complete ban of termination merely concerns half of the right to run a business and not the right’s destruction. The limitation imposed was in the general interest, and there is a presumption of reasonableness in support of a statute. Reliance has also been put on social and security laws as laid out by respected lawyers and judges overseas. It was also mentioned that under Article 31C of the Constitution covered the law.

Issues before the Apex court

  1. Whether A.19(1)(g) also includes the fundamental right to close down a business? 
  2. What if there is such a right, then whether the restrictions imposed by Ss. 25-O and 25-R of the Act, which in essence required prior approval by the government for closure of business, are reasonable or not?

Judgment

  1. The right to close a business cannot be made equivalent to a right not to start or carry on business at all. The powerful proposition urged on behalf of the employer by equating the two rights and placing them at par is not entirely suitable and sound. If a person does not start a business at all, then perhaps he can be compelled to create one under no circumstances. The negative aspect as to the right to carry on a company may be equated with the negative part of the right embedded in the concept of the right to freedom of speech, to form an association or to acquire or hold property. Perhaps under no situations and circumstances, a person can be compelled or coerced to speak, create an association, or achieve or maintain a property. But by imposing reasonable restrictions, he can be caused not to say, not to form an association or not to acquire or not hold any property. A total prohibition of business can be made possible by putting reasonable restrictions under Article 19(6) on the right to carry on a business.
  2. As a result, all petitions are allowed. It is claimed that Section 25-O of the Act as a whole and Section 25-R in so far as it relates to the grant of fines for violations of the provisions of Section 25-O are legally incorrect and null for infringement of Article 19(1)(g) of the Constitution. Consequently, in all cases, the challenged orders passed under subsection (2) of Section 25-O are found null and invalid, and the respondents are prohibited from applying them. To make it clear that, because the directives are based on the procedural invalidity of the statute in which they were made, the Court did not find it necessary to express our opinion on their merits in any other way.

Analysis of the judgment

  1. From the judgment of M/s Hatisingh Mfg. Co. Ltd. v. Union of India[1] held that the right to carry on any business includes a right to start, carry on or close down any undertaking, and the payment of compensation to the employees has not conditioned precedents to the closure of the business. In the instant case, the Court stated in a negative form that it is wrong to say that an employer has no right to close down a business once he starts it. If he has such a request, as obviously he has, it cannot be a fundamental right embedded in the right to carry on any business guaranteed under Art. 19(1)(g) of the Constitution.
  2. The constitutional validity of section 25FFF(l) of The Industrial Disputes Act, 1947 came to be considered by the said case of Hatisingh.
  3. The Court acknowledged that the owner should not be asked to be a party to them or to destroy the properties and company assets invested by not allowing him to close the undertaking. In a given case for the mismanagement of the performance resulting in lousy relation with the labour or incurring recurring losses, the State may take over the undertaking. It will be reconciled with the object of making India a Socialist State. Not allowing the employer to close down is essentially an interference with his fundamental right to carry on the business.
  4. The Court stated that in the event of termination, only a specified number of employees lose their jobs when other workers become unemployed at the time of closure. However, the Court has ruled that, merely because workers are unemployed, it cannot be seen as an excuse for not encouraging the employer to close its business. It becomes unprofitable and inefficient to run the same Company.
  5. The Supreme Court held subsection 25-O and 25-R to be constitutionally invalid, in violation of Article 19(1)(g) of our Constitution. The Court held that the impugned provisions constitute an unreasonable restriction on the right of the closure of business, which is a part of the freedom to carry on business as guaranteed by A.19(1)(g) of the Constitution.
  6. From the case of Narendra Kumar v. Union of India[2] the Court took considerations that “In applying the test of reasonableness, the Court has to consider the question in the background of the facts and circumstances under which the order was made, taking into account the nature of the evil that was sought to be remedied by such law, the ratio of the harm caused to individual citizens by the proposed remedy, to the beneficial effect reasonably expected to result to the general public. It will also be necessary to consider in that connection whether the restraint caused by the law is none then was necessary for the interests of the general public.”
  7. The Court observed that it is highly unreasonable to achieve the object of maintaining production of the commodity by compelling the employer not to close down in public interest for keeping production. The Court also observed that in case of bona fide closures, though the employers’ reasons are correct, adequate and sufficient, yet the permission to close might be refused on the ground of public interest. Hence the law is unconstitutional as it permits the authority to pass a capricious, whimsical and one-sided order.

The aftermath of the judgment

  1. The Excel Wear case is considered a landmark case on the Company’s inherent right to close down its business. If the Court, in this case, had not recognised the employer’s right to close down his business and had upheld the impugned provisions, then the Companies would have been at the mercy of the whims and fancies of the State. It would have discouraged people in business even to start their business, as a fear that they would be forced to carry on their business even if it was incurring heavy losses would have lurked continuously in their minds. The business environment would have been suffocated under the pretext of socialism.
  2. The value of the license must have prevailed, as the Company’s termination could be denied without any excuse being given. The continuation of the challenged clauses may have negatively affected the right of voluntary winding-up of the members. The government’s whims and fancies should have refused voluntary liquidation.
  3. In this case, the Court had recognised that the workers on the closing down of business would be put in considerable difficulty. But the Court at the same time held that refusing closure of business just because workers would become unemployed is an unreasonable restriction on the right to close down business as in every closure of business workers are bound to lose their jobs. That non-closure of business was not an appropriate remedy for unemployment. The Court held that the employees had to be compensated for the closure of the Company. This right to payment to employees has been accepted in S.529-A of the Companies Act, which states that workers must rate side by side with the secured creditors and above the government to recover their legal claims.
  4. Many cases were decided looking at the firm reliance that has been placed, like by the Madras and Rajasthan High Courts looked upon the on the decision of the Supreme Court of Excel Wear, the Court distinguished it from Meenakshi Mills[3] and noticed that the considerations which weighed with it to strike down.

Conclusion

The Excel Wear v. Union of India’s decision held that the reasons for which this Court has struck down S. 25-O are equally applicable for judging the validity of S. 25N. The Supreme Court agreed with the workers and held that the right to close down a business could not be equated with the right not to start or carry on a business at all. After analysis of the related company law provisions, it can be said that the right of the members’ of the Company of voluntary winding up and the right of the workers to compensation has been aptly balanced.

At the same time, the businessmen’s right to close down their business (and in particular the members’ freedom of voluntary winding up) has to be protected. The Apex Court in the Excel Wear case by holding the impugned provisions as unconstitutional has rightly prevented the businessmen from being forced to implore the government for permission to close down their business which could have been easily denied by the government arbitrarily and without any reason.

References

[1] 1960 AIR 923

[2] 1960 AIR 430

[3] 1994 AIR 2696

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