The recent demonetization measures (scheme) taken by the Indian Government (Government) in an attempt to curb corruption and black money has resulted in a host of unintended consequences.1 While the Executive’s primary intention is commendable, the planning and execution of the scheme leaves much to be desired from a policy perspective. The scheme has caused rippling effects throughout the economy and has left several sectors financially crippled due to the unforeseen cash crunch.2 This article aims to examine the consequences of the demonetization scheme in the Indian industrial sector in the narrow context of retrenchment in an attempt to shed light on the potential ramifications of the scheme on labour relations.3
Section 25FFF of the Industrial Disputes Act (ID Act), lays down the law applicable to the calculation and payment of retrenchment compensation to workers by the employer in cases where the undertaking is closed down.4 As per Sub-section (1) of the proviso, when an undertaking is closed down for any reason, every workman who has been in continuous service for not less than a period of one year from the date of closure is entitled to receive notice and compensation in accordance with Section 25F of the Act.5 Section 25F states that every retrenched workman who has been in continuous service shall receive one month’s notice or equivalent wage, retrenchment compensation to the tune of fifteen days average pay or any part thereof in excess of six months.6
However, Section 25FFF (1) is to be read subject to Sub-section (2) which provides that when there is a closure of an undertaking due to ‘unavoidable circumstances’ beyond the control of the employer, the compensation to be payable to the workman shall not exceed his average pay for three months.7 As evident, sub-section (2) significantly reduces the quantum of retrenchment compensation payable to a retrenched employee when the closure of the undertaking is on account of ‘unavoidable circumstances’. The term ‘unavoidable circumstances’ beyond the control of the employer is nowhere defined in the Act.
However, this proviso is subject to an appended Explanation (Explanation) which envisages specific situations which are identified as being ultra vires to ‘unavoidable circumstances’ beyond the control of the employer. The Explanation stipulates that closure of an undertaking by reason merely of financial difficulties or accumulation of undisposed stocks or the expiry of the period of the lease or licence granted to it or in a case where the undertaking is engaged in mining operations, exhaustion of the minerals in the area in which such operations are carried on shall not be deemed as closure due to ‘unavoidable circumstances’ beyond the control of the employer within the meaning of sub-section (2).8 This proviso restricts the meaning of the otherwise undefined term ‘unavoidable circumstances’.
While the proviso read with the Explanation may prima facie seem quite unambiguous and clear, pragmatic complications often arise upon closure of undertakings which are subjected to the provisions of the ID Act. Statistically, the most common causes behind the closure of industrial undertakings are industrial sickness, lack of finance, low profitability, unavailability of resources, and other economic conditions related to financial viability.9
Therefore, when an employer is compelled to close down an undertaking for bona fide reasons which are beyond his control such as lack of finance or unavailability of resources, the Explanation to sub-section (2) seems to prejudice the (otherwise pro-employer) provision against him. Theoretically and if read in isolation from commercial realities realities, sub-section (2) and the Explanation appear to be fairly worded and balanced in nature. However, if juxtaposed with commercial realities, the Explanation seems to be a mockery of sub-section (2) as the term ‘financial difficulties’ has been left undefined and could potentially include within its ambit a vast array of situations where an undertaking is forced to shut down due to various forms of monetary constraints. In such situations, the already cash strapped/ bankrupt employer is forced to incur additional expenditure by way of retrenchment compensation payable under Section 25F of the ID Act. This situation proves particularly burdensome for owners of medium and small scale industries falling within the application of the ID Act as they are not only forced to lose their primary source of livelihood due to no fault of theirs, but also meet additional overhead expenditures such as full retrenchment compensation which they often not in a capacity to pay. It is a settled position of law that the scope of retrenchment as per the ID Act is not confined to instances of surplusage, but has a wide connotation10 and includes all cases of termination which are not excluded in Section 2 (oo) of the Act.11
Therefore, as a result of the implementation of the demonetization scheme, several industrial establishments have been forced to close down and retrench their workers due to cash crunch or inability to procure adequate finance to run day to day operations.12 The hardest hit are the daily wage labourers who are not being paid by the employer.13 This situation may well attract Section 25FFF (2). The unexpected blow has obviously soured labour relations and caused discontentment among workers who now face the prospect of not only being retrenched, but also of receiving reduced retrenchment compensation as per Section 25FFF. The question therefore is whether and under what circumstances financial difficulties could amount to ‘unavoidable circumstances’? The same applies for undisposed stocks, expiry of lease or license and exhaustion of minerals in case of mining operations. This mixed question of law and fact has been subject to judicial scrutiny as discussed below.
Analysis of relevant jurisprudence
Before embarking on the specific meaning of ‘financial difficulties’ in the context of Section 25FFF, it would be apposite to examine financial difficulties or financial crisis at a broader level. An illustrative case on this point is that of The Cachar Chah Sramik Union Silchar, Assam v. The Management of the Tea Estate of Cachar, Assam.14 In that case, the entire tea industry in the Cachar district of Assam faced an unusual economic crisis. This crisis was the effect of a sudden recession in global tea prices. In view of the critical condition of the tea industry in Cachar, a Committee was constituted to examine the situation. The Committee recommended abandonment of uneconomic areas under tea and suggested offer of alternative employment to the surplus labour or provision of khet land, if available. In the midst of this crisis, the Central Government amended the Minimum Wages Act, to significantly increase the minimum wage rate payable to labourers. Due to this severe cash crunch, Tea Estates were forced to reduce working hours per week and even retrench several employees due to financial crisis. Before the Industrial Tribunal, the case of the Petitioners was that there was no genuine crisis which could justify retrenchment, lay off or even reduction of working days in a week. They further contended that the financial crisis was manipulated by the Respondent in order to evade paying the workers enhanced minimum wages pursuant to the amendment.
The Respondent contended that it compelled to reduce the number of working days and, in some cases, to resort to retrenchment because there was a real and sudden financial crisis in the industry and the industry could not be run with profit without resort to these measure. Upon examining these rival contentions, the Tribunal held that the financial crisis was genuine and was not a result of any manipulation and that the management was entitled to lay off, retrench and reduce working hours in accordance with the Standing Orders Act. The Supreme Court on appeal, upheld the decision of the Tribunal on the same grounds. Therefore, it is settled that to invoke financial crisis as any sort of defence or mitigating factor in industrial law, it must first and foremost be proved to be genuine in nature and not the result of manipulation or mala fide intention of the employer to deny workers their lawful dues.
Now that a broad understanding of financial crisis has been outlined, it may be examined in the context of Section 25FFF. The authority on this issue is Hatisingh Mfg. Co. Ltd. and Anr. v. Union of India (UOI) and Ors.15 In that case, there were three separate undertakings which were forced to close down because they became uneconomic units and incurred huge losses. Upon closure, the employees were retrenched and they contended that they were entitled to full retrenchment compensation as per Section 25FFF(1) because ‘financial difficulties (including loss)’ was specifically excluded from the purview of ‘unavoidable circumstances’. In this case, the constitutional validity of Section 25FFF (which was inserted via amendment in 1957) was also challenged on three grounds: (1) that it imposes unreasonable restrictions on the freedom guaranteed to every citizen by Art. 19(1)(g) of the Constitution to carry on business which freedom includes the right to close his business, (2) that it discriminates between different employers belonging to the same group placed in similar circumstances and thereby contravene Art. 14 of the Constitution, and (3) that contrary to Art. 20 of the Constitution, it penalises acts which when committed were not offences. Since the scope of this article is not to examine the constitutional validity of Section 25FFF, it will be sufficient to state that on all three grounds, the Supreme Court held that the provision was constitutional because it was equitable, fair and created intelligible difference based on a rational nexus. Moreover, this provision like those found in most industrial legislations in India primarily seeks to benefit the workers and to ensure that they are not unjustly exploited by their employers. On the specific issue of the unreasonableness of the Explanation, the Court held that proviso restricts the liability of employers who are compelled to close down their undertakings on account of unavoidable circumstances beyond their control, but in the view of the Parliament, in that category are not to be included employers compelled to close down their undertakings merely because of financial difficulties or accumulation of undisposed of stocks. Closure of an undertaking attributable merely to financial difficulties or accumulation of undisposed of stocks, is by the explanation, excluded from the benefit of restricted liability; but coupled with other circumstances, financial difficulties or accumulation of undisposed of stocks may justify the view that the closure is due to unavoidable circumstances beyond the control of the employer, and attract the application of the proviso notwithstanding the explanation.16
Hence, where an undertaking is closed down on account of persistent losses due to no fault of the employer or due to accumulation of stocks having regard to persistent unfavourable market conditions, the closure may normally be regarded as due to unavoidable circumstances beyond the control of the employer. By the explanation, the jurisdiction of the Tribunal which may be called upon to ascertain whether in a given case, the closure was on account of circumstances beyond the control of the employer and whether on that account the employer was entitled to the benefit. The Apex Court adopted a strict literal interpretation to the provision dealing with ‘financial difficulties’ and held that these words were preceded by the word ‘merely’. Hence, only in cases where an undertaking was closed down merely due to financial difficulties or any of the other conditions enumerated in the Explanation, would it not come within ‘unavoidable circumstances’. This reasoning has subsequently been adopted in several cases by different High Courts while dealing with various circumstances in which closure was effected on account of ‘unavoidable circumstances’. In essence, it has been seen that cases where financial difficulties/ persistent losses are coupled with other extenuating factors/circumstances such as unfavourable market conditions, adverse trade conditions, liquidation17, winding up18, gherao and violence19, unavailability of raw essential material20 etc. the closure may normally be regarded as due to ‘unavoidable circumstances’ beyond the control of the employer. The acid test, therefore, appears to be that if there is a slightest possibility of a businessman exerting himself and prudently trying to tide over the difficulty which has arisen as a mushroom one and take every possible effort to see that his business is continued, then avoidance of such a duty on the part of the businessman cannot be an equation of an unavoidable circumstance.21
However, in case of winding up of a company due to financial difficulties, various Courts after interpreting the relevant sections of the Companies Act, 1956 have held that since most companies are forced to wind up because of their own inability to repay debts or meet other financial obligations, it will not amount to ‘unavoidable circumstances’ beyond the control of the employer as the management of such companies often use the pretext of winding up against public interest.22
In conclusion, Courts have interpreted Section 25FFF and the Explanation in a literal manner and have been consistent in applying the ratio laid down in Hatisingh’s case (supra). Courts tend to consider the facts and circumstances of each individual case while applying this Section to ensure that public interest is served and the employer is not taking unjust benefit from the financial difficulties created in order to avoid paying legitimate compensation to the retrenched workers. This is the primary reason why Courts have tended to favour only those employers who close their undertakings on account of multiple difficulties beyond the scope of their control and for which they are not responsible instead of those who close their undertakings merely on grounds of financial difficulties created.
Therefore, as per the ratio evolved the demonetization scheme should logically amount to ‘unavoidable circumstance’ beyond the control of the employer because the employer due to no fault of his own is facing a genuine cash crunch similar to the one in Cachar Tea Estate.23 The Government’s policy is the sole reason behind the retrenchment of employees or at least a strong enough reason to avoid falling under the category of ‘mere financial difficulties’. It will be interesting to see how the Industrial Tribunals and other Courts deal with this issue if it comes up for adjudication in the near future. Will the Hatisingh ratio be applied or will it be overhauled as an upshot of the unintended implications of the demonetization scheme?
*Srinivas Raman is a law student at National Law University Jodhpur (India).
1. https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=38520; http://www.nytimes.com/aponline/2016/11/18/world/asia/ap-as-india-currency-chaos.html?_r=0
3. http://www.arunachaltimes.in/demonetization-agro-based-industries-in-trouble-as-labour-payment-affected/; http://timesofindia.indiatimes.com/city/jaipur/Construction-workers-to-rally-against-unplanned-demonetization/articleshow/55400660.cms
4. Section 25FFF, Industrial Disputes Act, 1947
5. Section 25FFF (1), Industrial Disputes Act, 1947
6. Section 25F, Industrial Disputes Act, 1947
7. Section 25FFF (2), Industrial Disputes Act, 1947
8. Section 25FFF (2) [Explanation], Industrial Disputes Act, 1947; Excel Wear and Ors. v. Union of India (UOI) and Ors. AIR1979SC25
9. Clive Lennox, Identifying failing companies: a re-evaluation of the logit, probit and DA approaches, 51 Journal of Economics and Business, 347 (1999)
10. Delhi Cloth & General Mills Ltd vs Shambhu Nath Mukherjee & Ors, 1978 AIR, 8 1978 SCR (1) 591
11. Section 2 (oo), Industrial Disputes Act, 1947
14. The Cachar Chah Sramik Union Silchar, Assam v. The Management of the Tea Estate of Cachar, Assam AIR1966SC987
15. Hatisingh Mfg. Co. Ltd. and Anr. v. Union of India (UOI) and Ors. AIR1960SC923
17. B. V. John v. Coir Yarn and Textiles Ltd. (1960) ILLJ311Ker
18. Madhab Chandra v. Nalini Manna 67 CWN 1037
19. Kalinga Tubes Ltd. v. Their Workmen  34 FJR 393
20. Ramchandra’s case  Lab IC 27
21. Supra note 19
22. Shree Madhav Mills’ case (1966) IILLJ827 Bom; S. Anthony Raj and Anr. V. A. Shanmugam and Ors. 80CompCas531(Mad)
23. Supra note 14