Orissa Textile and Steel Ltd v State of Orissa (2002)

This is the case that finally settles the constitutionality of prior permission for closure.

The story has three chapters. In Excel Wear v Union of India a Constitution Bench struck down s. 25-O as it then stood. In Workmen v Meenakshi Mills Ltd another Constitution Bench upheld s. 25-N, the corresponding provision for retrenchment. Parliament had meanwhile re-enacted s. 25-O by the Amendment Act 46 of 1982, and the High Courts divided: some held the new section still suffered from the vice identified in Excel Wear, others upheld it on the strength of Meenakshi Mills. This Bench resolves that conflict.

It is therefore the case to cite for four distinct propositions in Unit 6: that the right to close down a business is part of Art. 19(1)(g) but subject to reasonable restriction under Art. 19(6); that the amended s. 25-O cures each of the defects in the old section; that the appropriate Government, in granting or refusing permission, acts quasi-judicially; and that genuine and adequate reasons do not automatically entitle an employer to permission — the interest of the general public may still require a temporary refusal, though only where it is of a compelling or overriding nature.

The question before the Bench was the constitutional validity of s. 25-O of the Industrial Disputes Act 1947 as incorporated by Amendment Act 46 of 1982, and, in some matters, of s. 6-W of the U.P. Industrial Disputes Act, which the Court noted is identical to the amended s. 25-O, so that what was said of the one applied equally to the other. Because the issue was purely one of constitutional validity, the Court did not set out the facts of the individual matters at all.

The matters had been referred to a Constitution Bench because the questions raised involved the interpretation of various observations in Excel Wear's case and in Meenakshi Mills' case, the employers relying on the former and the workmen on the latter.

A preliminary submission for the workmen was that the reasons for which Excel Wear struck down s. 25-O had already been extracted by the Constitution Bench in Meenakshi Mills, that the passage so extracted bound the Court, and that the Court should not go to Excel Wear itself. The Court rejected it, holding on the authority of P.A. Shah v State of Gujarat that it is the duty of the Constitution Court "to form its own opinion about a given case and to consider the effect of a precedent by reading it over again, instead of relying upon the gloss placed on that precedent by some other decision."

The Court summarised the earlier decision. Excel Wear had negatived the submission that the right to close down a business was not a fundamental right but merely a right appurtenant to ownership of property, holding instead that the right to close down a business is an integral part of the fundamental right to carry on business under Art. 19(1)(g), subject to reasonable restriction under Art. 19(6). It held that the law could provide to deter reckless, unfair, unjust and mala fide closure. The challenge under Art. 14 was rejected, since Chapter V-B dealt only with comparatively bigger undertakings and of a few types only, so that the classification was reasonable. And it held that the reasonableness of restrictions must be examined both from the procedural and the substantive aspects of the law.

Section 25-O as it then stood was held unreasonable for six reasons, which the present Court listed: it did not require reasons to be given in the order, so that permission could be denied in the purported public interest of labour even where the reasons were adequate and sufficient, the matter being left to the whim and caprice of the authority; no time limit was fixed while refusing permission; there was no deemed provision for according approval; the order was not subject to scrutiny by any higher authority or tribunal in appeal or revision, nor open to review; the employer was compelled to resort to s. 25-N even after approval of closure; and the restriction imposed was more excessive than was necessary for the achievement of the object.

In Meenakshi Mills the Court, considering s. 25-N, had pointed out the differences between the two sections and held that the considerations which weighed in Excel Wear could not be applied to s. 25-N. It proceeded on the assumption that the right to retrench was an integral part of the employer's right under Art. 19(1)(g). It noted that the object of Chapter V-B was to prevent avoidable hardship to employees resulting from retrenchment, to check the growth of unemployment in establishments employing large numbers of workmen, and to maintain a higher tempo of production and productivity by preserving industrial peace and harmony, thus giving effect to the mandate of the Directive Principles. From that it followed that a restriction which has the effect of promoting or effectuating a directive principle can ordinarily be presumed to be a reasonable restriction in public interest, and so imposed in the interest of the general public. The employer's right was not absolute, and a restriction on his right to terminate the service of an employee was not alien to the constitutional scheme. Section 25-N was accordingly held not violative of Art. 19(1)(g) and saved by Art. 19(6).

The present Court held that the objects and reasons for enacting ss. 25-N and 25-O are the same, that both are in Chapter V, that s. 25-O too gives effect to the Directive Principles — an aspect not noted in Excel Wear but emphasised in Meenakshi Mills — and that the principles of Meenakshi Mills are therefore relevant in deciding the validity of the amended s. 25-O.

No reasons, and subjective satisfaction. Under the old sub-section (2) the appropriate Government could act "if it is satisfied that the reasons for intended closure of the undertaking are not adequate or sufficient or such closure is prejudicial to the public interest" — language which, as Meenakshi Mills had explained of the contrast with s. 25-N, implied a subjective satisfaction. Under the amended sub-section (2) the appropriate Government acts "after making such enquiry as it thinks fit, and after giving a reasonable opportunity of being heard to the employer, the workmen and persons interested in such closure", and, "having regard to the genuineness and adequacy of the reasons stated by the employer, interest of the general public and all other relevant factors", grants or refuses permission "by order and for reasons to be recorded in writing". The Government is therefore now bound to hold an enquiry into the correctness of the facts stated by the employer and all other relevant facts including his bona fides, to hear the employer, the workmen and all interested persons, and to pass a written reasoned order. That "envisages exercise of functions which are not purely administrative in character but quasi-judicial in nature". Following Meenakshi Mills, the words permitting such enquiry "as it thinks fit" do not allow the Government to dispense with the enquiry; they give it a discretion only as to the nature of the enquiry.

The Court also adopted the answer in Meenakshi Mills to the complaint that no guidelines govern the power. Guidelines are insisted on to control a discretion which is "purely administrative in character to be exercised on the subjective opinion of the authority"; the same is not true "when the power is required to be exercised on objective considerations by a speaking order after affording the parties an opportunity to put forward their respective points of view." On the sufficiency of reasons as a safeguard, S.N. Mukherjee v Union of India was relied on for the proposition that, irrespective of whether the decision is subject to appeal, revision or judicial review, the recording of reasons by itself serves a salutary purpose, in that "it excludes chances of arbitrariness and ensures a degree of fairness in the process of decision-making".

No time limit on a refusal. This is cured by sub-section (4), under which the order remains in force for one year from its date, so that at the end of the year the employer may apply afresh. The Court rejected the argument that he could not apply again on the same grounds: "if the reasons were genuine and adequate, the very fact that they have persisted for a year more is sufficient to necessitate a fresh look." Reasons that have persisted for a year can hardly be called the same; the difficulties faced during the year, if genuine and adequate, are themselves additional grounds; and by the end of the year the considerations of general public interest which justified refusal may no longer prevail. A fresh enquiry with a reasonable opportunity of being heard would have to be made. "In our view, providing for a period of one year makes the restriction reasonable."

No deemed permission. Cured by sub-section (3): if the order is not communicated within sixty days of the application, permission is deemed to have been granted.

No appeal, revision or review. Sub-section (5) empowers the appropriate Government, on its own motion or on an application by the employer or any workman, to review its order or to refer the matter to a Tribunal, which must make its award within thirty days of the reference. The employers objected that the section left this to the Government's discretion. The learned Attorney General fairly submitted that "may" should be read as "shall". The Court agreed, relying on Chief Controlling Revenue Authority v Maharashtra Sugar Mills Ltd, where a power was held to be "in the nature of an obligation or is coupled with an obligation and under the circumstances can be demanded to be used also by the parties affected", and on Western India Match Co. v Workmen, where "may" in s. 6-B of the U.P. Act was read as "shall". Accordingly the Government shall review the order if an application is made, and shall refer the matter to a Tribunal if so required; the review involves an enquiry into all necessary facts, particularly the genuineness and adequacy of the employer's reasons, an opportunity of being heard, and a written reasoned order, so that the Government in review acts quasi-judicially. Though no time limit is prescribed for the review, the Court held thirty days to be a reasonable period. This remedy is in addition to judicial review under Art. 226 or Art. 32, which, the power being quasi-judicial, Meenakshi Mills had held to be an adequate protection against arbitrary action.

Compulsion to comply with s. 25-N after approval. Under the old s. 25-O(7) the employer, even after permission, had still to give notice and compensation under s. 25-N — a requirement Excel Wear had criticised as impracticable, since it is "not practicable to give three months notice in writing or wages for the said period in lieu of notice or to pay the retrenchment compensation in advance as required by section 25-N before the employer gets an approval from the Government." Under the amended s. 25-O(8) the three months' notice is dropped; all that is required is compensation equivalent to fifteen days' average pay for every completed year of continuous service.

The employers' principal submission was that Excel Wear had struck down the old section not merely on procedural but on substantive grounds, and that the amendment cured only the procedural defects.

The Court disagreed. The amended section is now more akin to s. 25-N as it then stood, whose validity was upheld in Meenakshi Mills. Excel Wear itself accepted that reasonable restrictions could be placed under Art. 19(6) and recognised that in the interest of the general public it is possible to restrict, for a limited period of time, the right to close down a business. The amended section lays down the guidelines to be followed — above all the genuineness and adequacy of the reasons stated by the employer.

Then comes the balance that examiners look for. Genuine and adequate reasons do not oblige the Government to permit closure: "There could be cases where the interest of general public may require that no closure takes place." But the bar is high: "Undoubtedly where the reasons are genuine and adequate the interest of the general public must be of a compelling or overriding nature." The Court gave two illustrations — an industry manufacturing items required for the defence of the country, and an establishment manufacturing vaccines or drugs for an epidemic then prevalent — in which closure might have to be withheld for a time.

The Court also relied on sub-section (7) of the amended section, which allows the appropriate Government to direct that sub-section (1) shall not apply where there are exceptional circumstances such as an accident in the undertaking or the death of the employer. That, the Court said, shows that the section recognises that in exceptional circumstances there can be no compulsion to continue to run the business. But it added an express caution: it was not laying down that some difficulty or financial hardship would suffice — "The employer must show that it has become impossible to continue to run the establishment."

The argument that Excel Wear had prescribed extra compensation over and above retrenchment compensation as the proper method of restricting closure was rejected as a reading out of context: those observations were a suggestion as to one method, not the only method, as the passage relied on itself shows — "The law may provide to deter the reckless, unfair, unjust or mala fide closures. But it is not for us to suggest in this judgment what should be a just and reasonable method to do so."

The employers attacked the phrase as vague and of very wide amplitude. The Court answered from Maneka Gandhi v Union of India, where the identical words, borrowed from Art. 19(5), had been held to have "a clearly well defined meaning", the Courts having often decided whether an action is in the interests of the general public "and no difficulty has been experienced by the Courts in carrying out this exercise"; it would, that judgment said, "be nothing short of heresy to accuse the Constitution-makers of vague and loose thinking." Premium Granites v State of Tamil Nadu was to the same effect, that the expression is of a definite concept with nothing vague about it. The phrase as used in the amended s. 25-O "has been bodily lifted from Article 19(6) of the Constitution of India", and if it is not vague in the Constitution it does not become vague in the section.

It was argued that a restriction under Art. 19(6) must be imposed by law, that delegated or subordinate legislation would do but a mere executive determination would not, and that the amended section left the content of the restriction to the executive case by case, which was an impermissible delegation of legislative function. The Court held that the amended s. 25-O is itself the law which lays down the restriction; it is the section that confers the power to grant or refuse permission; it would be impossible to enumerate in the section every contingency that may arise in practice, each case must be decided on its own facts and on the circumstances prevailing at the time, and all that can be set out in the section are guidelines, which it does set out.

The submission that the section is discriminatory, in that a firm of lawyers or chartered accountants or doctors or a hospital employing several hundred workmen may close on notice and compensation while a factory, mine or plantation may be refused permission, was rejected on the ground that just such an argument had been negatived in Excel Wear, where the classification was held reasonable.

The amended s. 25-O of the Industrial Disputes Act 1947 — and with it s. 6-W of the U.P. Industrial Disputes Act — is not ultra vires the Constitution and is saved by Art. 19(6). The appeals and writ petitions were sent back to a Division Bench for decision in accordance with law.

The right to close down a business is part of the freedom guaranteed by Art. 19(1)(g), but may be subjected to reasonable restriction under Art. 19(6); a restriction which effectuates a Directive Principle is ordinarily presumed reasonable and in the public interest. Section 25-O as substituted in 1982 removes each vice for which the earlier section was struck down: it requires an enquiry, a hearing of the employer, the workmen and interested persons, and a written order recording reasons by reference to the genuineness and adequacy of the employer's reasons, the interest of the general public and all other relevant factors; it limits the operation of a refusal to one year; it deems permission granted if no order is communicated within sixty days; it provides for review or reference to a Tribunal, the power to review and refer being obligatory when invoked by a party; and it no longer compels compliance with s. 25-N after permission. The power so conferred is quasi-judicial, so that the absence of further statutory guidelines is not fatal and judicial review under Arts. 226 and 32 is an adequate safeguard. Permission need not be granted merely because the employer's reasons are genuine and adequate, but in such a case the countervailing interest of the general public must be of a compelling or overriding nature; and mere difficulty or financial hardship will not do — the employer must show that it has become impossible to continue to run the establishment.