Madras High Court
S. Anthony Raj And Another vs A. Shanmugam And Others on 2 December, 1993
Equivalent citations: [1994]80COMPCAS531(MAD), (1995)IILLJ1208MAD
JUDGMENT Mishra, J.
1. The first respondent has filed C.A. No. 206 of 1992 and C.A. No. 207 of 1992, the first in his individual capacity and the second in his capacity as the vice-president of the Madras Pen and Ink Factories Workers' Union. A learned single judge of this court has in the applications held that (i) the workmen, who become secured creditors by operation of law from the date of the winding up order, have a pari passu charge over the security which is held by the secured creditors under the contract; (ii) the cut-off date for arriving at the ratio at which the sale proceeds should be divided on a pari passu basis as per section 529 of the Companies Act, 1956, should be the date of the winding up order and not the date of sale; and (iii) the workmen are entitled to claim interest from the date of the winding up order till the date of realisation of security. He (the learned single judge) has set aside the order of the official liquidator determining the closure compensation and the payment of interest on the admitted amount. To have a grip on the controversy between the parties we may notice some of the relevant facts at the outset. The company known as Pilot Pen Co. (India) P. Ltd. has gone into liquidation and has been ordered to be wound up on October 27, 1978, in C.P. No. 11 of 1978. Consequent on the passage of the winding up order, the official liquidator has entered upon his duties and taken control and possession of the administration and properties of the company. The liquidator took up the claim of the workmen in which, however, he himself posed a question whether the undertaking of the company in liquidation was closed down on account of unavoidable circumstances beyond the control of the employer, and found that the undertaking of the company in liquidation was closed down with effect from October 27, 1978, consequent on the winding-up order and concluded that since the closure was due to unavoidable circumstances beyond the control of the company in liquidation, for, it was closed down due to the winding-up order, the claim should be to closure compensation to the extent provided under the proviso to section 25FFF(1) of the Industrial Disputes Act. The two applications were brought before the court by the applicant respondent, Shanmugham, seeking to quash the official liquidator's order so far as it related to the closure compensation and also to direct payment of interest at 18 per cent per annum on the admitted amount and accordingly to set aside all orders in the proceedings relating to the claim of the workmen.
2. The learned company judge has held that the closure of the company was not due to unavoidable circumstances beyond the control of the company, that the workmen would be entitled to closure compensation as prescribed under the first part of section 25FFF(1) of the Act and that the workmen, on the operation of law, having been given the status of the secured creditors are entitled to the above benefits of compensation with interest as prayed for.
3. Two of the members of the board of directors of the company under liquidation, one who held the office of the managing director and the other that of a director have come in appeal before us and raised various grounds. Learned counsel for the appellants has contended that the explanation given by the learned single judge, as per the provisions in section 25FFF(1) of the Act, is not correct, and is against the judicial consensus in the sense that such a provision should be strictly construed bearing in mind the Explanation which sets out the circumstances which shall not be deemed to be unavoidable circumstances beyond the control of the employer. Section 25FFF of the Act, which has undergone several amendments, reads as follows :
"25FFF. Compensation to workmen in case of closing down of undertakings. - (1) Where an undertaking is closed down for any reason whatsoever, every workmen who has been in continuous service for not less than one year in that undertaking immediately before such closure shall, subject to the provisions of sub-section (2), be entitled to notice and compensation, in accordance with the provisions of section 25F, as if the workman had been retrenched :
Provided that where the undertaking is closed down on account of unavoidable circumstances beyond the control of the employer, the compensation to be paid to the workman under clause (b) of section 25F shall not exceed his average pay for three months.
Explanation. - An undertaking which is closed down by reason merely of -
(i) financial difficulties (including financial losses); or
(ii) accumulation of undisposed of stocks; or
(iii) the expiry of the period of the lease or licence granted to it; or
(iv) 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 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."
4. Besides section 25FFF of the Act a provision has been introduced in section 25O of the Act, which was amended by Act 46 of 1982 and came into force with effect from August 21, 1984, which reads as follows :
"25-O. Procedure for closing down an undertaking. - (1) An employer who intends to close down an undertaking of an industrial establishment to which this Chapter applies shall, in the prescribed manner, apply, for prior permission at least ninety 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 and a copy of such application, shall also be served simultaneously on the representatives of the workmen in the prescribed manner :
Provided that nothing in this sub-section shall apply to an undertaking set up for the construction of buildings, bridges, roads, canals, dams or for other construction work.
(2) Where an application for permission has been made under sub-section (1), the appropriate Government, after making such enquiry as it thinks fit and after giving a reasonable opportunity of being heard to the employer, the workmen and the persons interested in such closure may, having regard to the genuineness and adequacy of the reasons stated by the employer, the interests of the general public and all other relevant factors, by order and for reasons to be recorded in writing, grant or refuse to grant such permission and a copy of such order shall be communicated to the employer and the workmen.
(3) Where an application has been made under sub-section (1) and the appropriate Government does not communicate the order granting or refusing to grant permission to the employer within a period of sixty days from the date on which such application is made, the permission applied for shall be deemed to have been granted on the expiration of the said period of sixty days.
(4) An order of the appropriate Government granting or refusing to grant permission shall, subject to the provisions of sub-section (5), be final and binding on all the parties and shall remain in force for one year from the date of such order.
(5) The appropriate Government may, either on its own motion or on the application made by the employer or any workman, review its order granting or refusing to grant permission under sub-section (2) or refer the matter to a Tribunal for adjudication :
Provided that where a reference has been made to a Tribunal under this sub-section it shall pass an award within a period of thirty days from the date of such reference.
(6) Where no application for permission under sub-section (1) is made, within the period specified therein, or where the permission for closure has been refused, the closure of the undertaking shall be deemed to be illegal from the date of closure and the workmen shall be entitled to all the benefits under any law for the time being in force as if the undertaking had not been closed down.
(7) Notwithstanding anything contained in the foregoing provisions of this section, the appropriate Government may, if it is satisfied that owing to such exceptional circumstances as accident in the undertaking or death of the employer or the like it is necessary so to do, by order, direct that the provisions of sub-section (1) shall not apply in relation to such undertaking for such period as may be specified in the order.
(8) Where an undertaking is permitted to be closed down under sub-section (2) or where permission for closure is deemed to be granted under sub-section (3), every workman who is employed in that undertaking immediately before the date of application for permission under this section, shall be entitled to receive compensation which shall be equivalent to fifteen days' average pay for every completed year of continuous service or any part thereof in excess of six months."
5. An examination of the language employed in section 25FFF of the Act would reveal that any closure of an industrial undertaking for any reason whatsoever will attract section 25F of the Act in the case of every workman who has been in continuous service for not less than one year immediately before such closure subject to the provisions and except the undertakings engaged in the construction of buildings, bridges, roads, canals, dams or for other construction work which are covered by sub-section (2) thereof. No workman employed in such construction work shall be entitled to compensation under clause (b) of section 25F of the Act if the work is closed down on account of the completion of the work within two years; however, if the work is not completed within two years, the workmen employed in such construction works also will become entitled to compensation in terms of section 25F of the Act. An exception is created, however, to the said rule by a proviso which says that where an undertaking is closed down on account of unavoidable circumstances beyond the control of the employer, the compensation to be paid to the workmen under clause (b) of section 25F of the Act shall not exceed his average pay for three months meaning the compensation payable under section 25F of the Act to a workman in such an undertaking shall be governed by the rule in section 25F(b) of the Act but the compensation limit is fixed at the average pay for three months only. We shall enter into the case law in brief to understand the meaning given to the word "unavoidable circumstances beyond the control of the employer". But, before we do so, we may refer to the Explanation which has existed as a part of the statute and has undergone amendment by Act 45 of 1971 which reads as follows :
"An undertaking which is closed down by reason merely of -
(i) financial difficulties (including financial losses) or
(ii) accumulation of undisposed of stocks; or
(iii) the expiry of the period of the lease or licence granted to it; or
(iv) 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 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."
6. In the instant case, we are not concerned with either sub-section (1A) or sub-section (2) of section 25FFF of the Act. Our concern is the proviso to sub-section (1) and to see whether, on the facts of the instant case, it is reasonable to say that the company was closed down on account of unavoidable circumstances beyond the control of the employer. If the answer to this is "yea" the appeal must subsist. If the answer is "nay" the appeal must fail.
7. A learned single judge of the Kerala High Court in B. V. John v. Coir Yarn and Textiles Ltd. , decided a case of a workman who claimed compensation under section 25F(b) of the Act free of the limitation imposed by the proviso to section 25FFF(1) of the Act. The workmen in the case before him were those whose services were terminated before the official liquidator took charge of the winding-up proceedings and before the closure was effected as a consequence of the winding-up order. In his opinion (at page 165 of 30 Comp Cas) :
"The closing down of an undertaking need not be, and rarely is, all on a sudden and a matter of an instant; it can be, and often is, in stages and spread over some time."
8. He noticed in the judgment the fact that the company had suffered heavy losses and the general trade outlook was so gloomy that it had little chance of survival and indeed the petition for winding up was based on the ground that the very substratum of the company was gone. It was in these circumstances that the board of directors, in whom the management vested, decided in June, 1955, that the business be closed down and the company go into voluntary liquidation. It was in pursuance of this decision that the company gradually reduced its business and, with the sanction of the Industrial Tribunal (with regard to the 22 staff members involved in the dispute) dispensed with the services of the bulk of its workmen. According to the learned single judge this was the first stage of the closing down. The next stage was when on taking charge, the provisional liquidator decided to stop the business except with regard to the execution of pending orders, and, after obtaining orders of the court, dispensed with the services of the 23 workmen on January 17, 1957, and of six more workmen on June 11, 1957. The final stage by which the closure was completed was on July 24, 1957, when, on the passing of the winding up order, the liquidator discharged all the remaining workmen. The learned judge thus concluded (at page 166 of 30 Comp Cas) :
"I take the view that the termination of the services of all the petitioners was on the closing down of the undertaking. And, from the facts stated above, it should be clear that this closure was on account of unavoidable circumstances beyond the control of the employer within the meaning of the proviso to section 25FFF(1) of the Industrial Disputes Act, 1947. There is nothing to show that the company was responsible for the adverse trade conditions which made it impossible for it to continue - in fact it would appear that the company was depending solely on foreign buyers and that its business fell, owing to import restrictions imposed by the countries concerned. In the end, the company had to be compulsorily wound up, and there is no allegation that the winding-up petition was fraudulent or collusive. In the circumstances, it can scarcely be said that the undertaking was closed down by reason merely of financial difficulties or financial losses."
9. We shall examine, however, whether the above view is in consonance with the spirit of section 25FFF(1) or not, but we do notice that the learned judge was not ready to accept any closure for the reason of any fraudulent or collusive act of the employer leading to the winding up of the company, as one falling under the limitation of three months' compensation.
10. Section 25FFF of the Act has been tested on the touchstone of article 14 of the Constitution of India in the case of Hathising Mfg. Co. Ltd. v. Union of India . Although not strictly speaking about the extent and reach of this section, the Supreme Court has indicated the plain intendment of this provision which we have already quoted. This, by reference, brings in section 25F of the Act which provides as follows :
"No workman employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until -
(a) the workman has been given one month's notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workmen has been paid in lieu of such notice, wages for the period of the notice;
(b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days' average pay (for every completed year of continuous service) or any part thereof in excess of six months; and
(c) notice in the prescribed manner is served on the appropriate Government or such authority as may be specified by the appropriate Government by notification in the Official Gazette."
11. The Supreme Court has said that there is difference in phraseology between section 25F and section 25FFF of the Act. Whereas in section 25F of the Act certain conditions precedent to retrenchment of workmen are prescribed, section 25FFF(1) of the Act merely imposes liability to give notice and to pay compensation on closure of an undertaking which results in termination of employment of the workmen. Under section 25F of the Act, no workman employed in an industrial undertaking can be retrenched by the employer until (a) one month's notice in writing indicating the reasons for retrenchment has been given to the workman and the period of notice has expired, or the workman has been paid, in lieu of such notice, wages for the period of the notice, (b) he is paid compensation which shall be equivalent to fifteen days' average pay (for every completed year of continuous service) or any part of thereof in excess of six months, and (c) notice in the prescribed manner is served on the appropriate Government. Section 25FFF(1) of the Act indicates that the workman is entitled to compensation in accordance with the provisions of this section if the undertaking is closed for any reason as if the workman has been retrenched. By the plain intendment of section 25FFF(1) of the Act, the right to notice and compensation for termination of employment flows from closure of the undertaking; the clause does not seek to make closure effective upon payment of compensation and upon service of notice or payment of wages in lieu of notice. An employer proposing to close his undertaking may serve notice of termination of employment and if he fails to do so, he becomes liable to pay wages for the period of notice. On closure of an undertaking, the workmen are undoubtedly entitled to notice and compensation in accordance with section 25F of the Act as if they had been retrenched and they are entitled besides compensation to a month's notice or wages in lieu of such notice, but by use of the words "as if the workman had been retrenched" the Legislature has not sought to place closure of an undertaking on the same footing as retrenchment under section 25F of the Act. By section 25F of the Act, a prohibition against retrenchment until the conditions prescribed by that section are fulfilled is imposed; by section 25FFF(1) of the Act, termination of employment on closure of the undertaking without payment of compensation and without either serving notice or paying wages in lieu of notice, is not prohibited. Payment of compensation and payment of wages for the period of notice are not, therefore, conditions precedent to closure.
12. After pointing out the above, it is clearly spelt out that as a consequence of closure of the undertaking the entitlement of the workmen to compensation as provided under section 25F of the Act is not to be confused with the obligation of the employer to give notice of termination of service in case the management decided to retrench the workmen. The Supreme Court has said that the impugned section providing for payment of compensation is evidently related to the object sought to be achieved by Parliament, i.e., securing social justice. The right to receive compensation arises because the workman is exposed to undeserved wants and the reasons for closure may have no direct bearing thereon. Payment of compensation which is directed to be made at the rate of 15 days' wages for every completed year of service cannot again be characterised, as was sought to be done by one of learned counsel for the petitioners, as "drastic in its scope and content". The Supreme Court has further observed as follows (at page 190 of 18 FJR) :
"Normally, if the business is capable of meeting the obligation to pay the wages of the workmen and to meet the other expenses necessary for its continuance, it would not be closed down. Capacity to has, therefore, to be taken into account in the case of a running business in assessing liability to fix wages or gratuity or dearness allowance. Once the undertaking is closed and liability to pay compensation under the impugned section is not made a condition precedent, the amount which the workmen may be able to recover must depend upon the assets of the employer which may be available to meet the obligation. The workmen would be entitled to recover compensation only if the employer is able to meet the obligation otherwise they would have to rank pro rata with the other ordinary creditors of the employer."
13. A reference has been made in this judgment to the proviso and the Supreme Court has said that the Legislature has imposed restricted liability in cases where closure is due to circumstances beyond the control of the employer. Under the proviso to sub-section (1) of section 25FFF, where the undertaking is closed down on account of circumstances beyond the control of the employer, the compensation to be paid to the workman is not to exceed his average pay for three months. If the principal provision is not unconstitutional as imposing and unreasonable restriction, it is not suggested that the proviso is on any independent ground unconstitutional. The Supreme Court has added as follows (at page 190 of 18 FJR) :
"The effect of the impugned section along with the proviso is to classify the undertakings into two classes, viz., (1) those which are closed down on account of unavoidable circumstances beyond the control of the employer and (2) the remaining. When the closure of an undertaking is due to circumstances beyond the control of the employer, the maximum limit of compensation is average pay for three months, irrespective of the length of service of the workmen : in the residuary class, the liability is unrestricted. The Explanation is in substance a definition clause which sets out what shall not be deemed to be closure on account of circumstances beyond the control of the employer. By this Explanation, employers who had to close down their industrial undertakings merely because of financial difficulties including financial losses or accumulation of undisposed of stocks are excluded from the benefit of the proviso to section 25FFF(1). The 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 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."
14. What is thus decipherable from the judgment of the Supreme Court is that closure on account of unavoidable circumstances beyond the control of the employer is one which is not attributable merely to financial difficulties or accumulation of undisposed of stocks but because of other circumstances, if it is made justifiable, that the closure is due to unavoidable circumstances beyond the control of the of the employer. Involuntary closure, that is closure when the employer is not intending to close but has been compelled to close as it is beyond him to run the industry, is alone covered by the proviso. Closure for the reason of inaction of the employer, closure for the reason of inaction of the employer, closure for the reason of the employer not discharging its statutory and moral obligations are not covered by the proviso. In all cases, as has been observed by the Supreme Court, when a plea in this behalf is raised to deny to the workmen the creditor's benefits for wages under section 25FFF(1) and only restricted benefit under the proviso to section 25FFF of the Act is sought to be paid, it will be necessary to ascertain whether closure was on account of any of any such act of the employer which facilitated the closure and if it is found that the employer is not free from blame, then the general rule under section 25 of the Act has to be applied and not the exception under the proviso to section 25FFF(1) of the a Act.
15. A learned single judge of the Calcutta High Court in the case of Madhab Chandra v. Nalini Manna [1963] 67 Cal WN 1037 considered the case of the employees who were retrenched because of the closure of the undertaking as a consequence of the winding up of the company. He noticed in his judgment that the employer bank continued the service contract up to the date of making of the winding up order and the common case before him was that the services of the employees excepting one were discharged by reason of section 445(3) of the Companies Act. When it was contended before him in the case of closure of business, the compensation has to be awarded according to the provisions of section 25F of the Act, the learned judge observed : "I do not accept this contention of Mr. Chaudhuri as section 25FFF clearly confers some rights upon employees to which they were not entitled before this section was introduced.
16. The proviso to the section, however, lays down that where the closure is due to unavoidable circumstances beyond the control of the employer, the compensation of the employer, the compensation to be paid to the workmen shall not exceed his average pay for three months."
17. He in short thus held :
"If the closure is held as a consequence of the winding up and the employees are removed for that reason, they are not entitled to the benefit under clause (1) of section 25FFF which are governed by the proviso thereto."
18. A Division Bench of the Kerala High Court, however, has observed in the case of Palai Central Bank Employees' Union v. Official Liquidator [1965] 35 Comp Cas 279; [1965] 2 Comp LJ 110 that a closure as a consequence of a notice under section 445(3) of the Companies Act is one for unavoidable circumstances. It seems, however, that there was no serious exercise to see whether in such a case the antecedent facts leading to the closure should be examined or not or it is an absolute rule that closure as a consequence of the winding up is always one falling under the limitations of the proviso to section 25FFF(1) of the Act. In that judgment, it is observed (at page 280) :
"The second objection is that the learned judge should not have confined the compensation for termination of employment to a maximum of average pay for three months under the proviso to sub-section (1) to section 25FFF of the Industrial Disputes Act. The contention is that the winding up of the bank was not due to unavoidable circumstances beyond the control of the directors, because the winding-up order itself shows that there was mismanagement which necessitated the winding up. As pointed out by our learned brother, the argument has no force whatsoever. The closing down of the bank was something was something imposed on it by the order of the High Court and was, therefore, on account of unavoidable circumstances beyond its control. It was, in fact, in spite of and overruling the objections against winding up. The question that it was misconduct or mismanagement that brought about the winding up is not relevant to the consideration whether the closing down was imposed on it by the court. We agree with Raman Nayar J. that unless the order of the court was obtained by collusion or fraud, every case of closure following an adjudication in insolvency or a compulsory winding up must necessarily come within the proviso to sub-section (1) of section 25FFF. There is us thus no substance in this objection either."
19. A contrary view, however, to the above Kerala High Court opinion is available in the judgment of a learned single judge of the Bombay High Court in Shree Madhav Mills, In re, . The learned judge has observed as follows (at page 319 of 32 FJR) :
"On a reading of the provisions in sub-section (1) of section 25FFF, it is clear beyond doubt that in all cases where an industrial undertaking is closed down, every workman who has been in continuous service for not less than one year immediately before such closure is entitled to notice and compensation in accordance with the provisions in section 25F as if the workman had been retrenched. This right, however, is subject to the provisions in sub-section (2) and the proviso to sub-section (1) of section 25FFF. Having regard to the clear provisions in sub-section (1), it would be incumbent upon the employer to prove that the circumstances mentioned in the proviso exit and for that reason the workmen and/or employee is not entitled to compensation as mentioned in the main part of sub-section (1). It would be accordingly incumbent upon the employer to prove if lesser compensation is to be paid to the workmen that the undertaking was closed down on account of unavoidable circumstances beyond the control of the employer. In case in which the employer fails to rely upon the contents of the proviso to sub-section (1) and to prove the above facts, the workmen and/or employee would always be entitled to compensation as mentioned in sub-section (1). The Explanation to the proviso must be read in the light of the above correct construction of the provisions in sub-section (1). The Explanation only refers to two particular contingencies in which the Legislature decided that a finding would have to be made that the closure was not due to unavoidable circumstance beyond the control of the employer. In other words, the Legislature laid down that closure merely by reason of financial difficulties or accumulation of undisposed of stocks could not be held to be closure on account of unavoidable circumstances beyond the control of the employer.
The liquidator has come to the conclusion that in all cases the closure due to winding up orders made by court would be on account of unavoidable circumstances beyond the control of the employers, In this connection, he has relied upon the fact that the winding up order results in statutory notice of termination of services of employees. This conclusion appears to me to be contrary to the intent and purpose of the provisions, in section 25FFF In all cases of claims for compensation, the only important issue which arises for decision having regard to the provisions in section 25FFF would be whether the undertakings were closed down on account of unavoidable circumstances beyond the control of the employers. The answer to that question would depend upon diverse circumstances. Petitions for winding up in most cases would be based upon the failure of the companies to discharge their debts in due course of business. In almost all cases, such failure would necessarily result in winding-up orders. The winding up orders in such cases most be considered the result of financial difficulties of the companies and/or inability of the companies to discharge all their debts in due course of business. In most cases, it would be impossible to make finding that because the court has intervened and passed winding up orders, the closure of the undertakings is due to or on account of unavoidable circumstances beyond the control of the employers. On the contrary, in those circumstances, the appropriate finding would be that the financial difficulties were in fact the result of the companies' usual trading activities and were not on account of unavoidable circumstances beyond the control of the companies. It is clear that diverse different facts would have to be examined if the companies raise the question that their undertakings were closed down on account of 'unavoidable circumstances beyond the control of the employer.'"
20. Some observations of a Bench of the Supreme Court in the case of Payment of Wages Inspector v. Surajmal Mehta , appear to be educative on the effect of the special provisions made for the workmen under section 2(oo), Section 25FF and section 25FFF of the Act. While considering the contentions on the question on the question whether compensation payable under section 25FF of the Act can fall under the amended definition in section 2(vi)(d) of the Act and can be called wages, the Supreme Court has observed that the Industrial Disputes Act which was enacted in 1947, as a piece of legislation for settlement of industrial disputes had since then undergone frequent modifications. By Act 43 of 1953, a new Chapter V-A was incorporated containing provisions for compensation for lay-off and retrenchment. It also provided a definition of "retrenchment" in section 2(oo). In Hariprasad v. A. O. Divelkar [1956] 11 FJR 317; AIR 1957 SC 121, the Supreme Court held that retrenchment as defined in section 2(oo) and word "retrenchment" in section 25F of the Act meant discharge of surplus labour or staff by the employer for any reason whatsoever otherwise than as a punishment inflicted by way of disciplinary action and did not include termination of services of all workmen on a bona fide closure of an undertaking or on a change of ownership of the management thereof. This decision was followed first by an Ordinance and then by Act 18 of 1957, incorporating in Act the present sections 25FF and 25FFF. Both this sections use the words "as if the workmen had been retrenched." The intention of the Legislature is, therefore, clear that it did not wish to place transfer and closure on the same footing as retrenchment under section 25F. This is apparent also from the fact that it left the definition of retrenchment in section 2(oo) untouched in spite of the decision in Hariprasad's case [1956-57] 11 FJR 317; AIR 1957 SC 121. The three sections 25F, 25FF and 25FFF also show that while under section 25F no retrenchment can made until the conditions therein set out are carried out, the other two sections do not lay down such conditions. All the three sections, however, involve termination of service whether it results in the consequence of retrenchment or transfer or closure, and notice and compensation in both sections 25FF and 25FFF have been provided for "in accordance with the provisions of section 25F."
21. In K. Sathiarthy v. New Era Mfg. Co. Ltd. [1970] 38 FJR 144; [1970] Lab IC 1454, a learned judge of the Kerala High Court, however, has considered a case of closure of an undertaking by the liquidator appointed by the court in winding-up proceedings and has said that on such facts a conclusion is unavoidable that the business of the company was closed down under circumstances beyond the control of the employer. This judgment of the Kerala High Court has not made any improvement upon the Division Bench view of the said court in the case of Palai Central Bank Employees' Union v. Official Liquidator [1965] 35 Comp Cas 279. No reasons are found recorded in support of the view expressed in it. We need to make no further research, however, except the judgments on the on the interpretation and application of the proviso to sub-section (1) of section 25FFF of the Act and the Explanation to the said section. A Bench decision of this court in the case of Venkatarama v. Presiding Officer, Labour Court [1979] 54 FJR 364; [1980] Lab IC 923 and decision of the Bombay High Court in Ramchandra Tukaram Jadhav v. Belapur Sugar Mills Ltd. [1982] Lab IC 27 are to such judgments.
22. In Venkatarama's case [1979] 54 FJR 364; [1980] Lab IC 923, a Bench of this court has noticed the exception carved out by the proviso that when an undertaking is closed down on account of unavoidable circumstances beyond control of the employer, the compensation to be paid to the workmen under clause (b) of section 25F of the Act shall not exceed his average pay for three months in these words (at page 367 of 54 FJR) :
"The Legislature in its wisdom has given certain illustrations by way of an Explanation to this proviso, so as to make it more or less clear or possibly explicit as to what possibly the Legislature meant by saying that the undertaking is closed down on account of unavoidable circumstances. In a negative fashion, the Legislature said that if an undertaking is closed down by reason merely of financial difficulties or accumulation of undisposed of 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, they shall not be deemed to be instances under which it could be said that an undertaking has been closed down on account of unavoidable circumstances beyond the control of the employer.
In our view, the Explanation which provides for such contingencies under which the employer cannot escape his obligation to pay the full compensation as provided in clause (b) of section 25F is purely illustrative and not exhaustive. That this is so illustrative is seen from a decision of the Supreme Court in Kalinga Tubes Ltd. v. Their Workmen [1968] 34 FJR 393; [1969] 1 Lab LJ 557; [1969] IC 90. That was a case where the undertaking was closed on account of violence deployed by the workmen in that they gheraoed the management. Obviously, gherao or prevention by such violent means against the management from normally proceeding with its commercial activity is not one of those contingencies expressly contemplated in the Explanation to the proviso to section 25FFF of the Industrial Disputes Act. We are only citing this decision of the Supreme Court as an illustration for the proposition that the circumstances delineated in the Explanation to the proviso to section 25FFF are not conclusive or exhaustive but there might be circumstances where a reasonable person would still, on the circumstances and facts of each case, find that there were unavoidable circumstances which prevented the employer from continuing his commercial activity and close it down due to unavoidable circumstances. In fact, in the decision cited above, the Supreme Court expressed thus (at page 408 of 34 FJR) :
'Notwithstanding all this the Legislature provided that in spite of the aforesaid difficulties or impediments or obstacles the conditions of the proviso would not be satisfied merely by the happening or existence of the circumstances embodied in the Explanation. The reason for doing so seems to be that whenever such difficulties, as are mentioned in the Explanation arise, the employer is not expected to sit idly and not to make an all out effort like a prudent man of business in the matter of tiding over these difficulties for saving his business'.
In another portion of their judgment, the Supreme Court expressed the view (at page 406 of 34 FJR) :
'Undoubtedly, if the management had engaged an army of darwans, they could have restored peace but that was not what the employer could be compelled to do as he was entitled to run his business in a normal manner'.
Undoubtedly, the deployment of an army of darwans in a peace loving country like ours is directly against the well-known axiom laid down by Mahatmaji. We are not expected to fight violence with violence. But the point is whether in such circumstances, the employer could think of any other method or methodology as a prudent businessman to avoid the contingency and continue his commercial activity. 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. But, in the instant case, it is the admitted case of the parties that Burmah Shell which was supplying the raw material, namely, petrol, refused to supply any more such raw material and but for such supply, it is conceded that there could not have been any business worth the name which the employer could have conducted. Therefore, any effort, reasonable or otherwise, which the employer could have possibly taken in order to resume such supplies of raw material, namely, petrol, from Burmah Shell could not have borne fruit at all. In fact there is no altercation that the employer did not take any such effort. In such circumstances, we are of the opinion that the closure was not a result of any overt or covert act on the part of the employer, but it was due to circumstances beyond his control. We are also satisfied, as Ismail J. has expressed, that the closure was bona fide by itself because the employer could not do anything from his side nor could be exert himself to restore his commercial activity in a manner known to the mercantile world. In this sense, therefore, we are of the view that this is not a case where the employer did not resume his business after the expiry of the period of the lease or licence as contended by Mr. Somayaji; but this is a case where he could not have at all indulged in any commercial activity because the main raw material which was the subject-matter of the activity could not be got by him from the source and there was no business for him to indulge in. In these circumstances, we agree with the learned single judge that the closure was due to unavoidable circumstances and that the Explanation to the proviso to section 25FFF does not apply to the facts of this case; but, on the other hand, this is a case in which the payment of three months' average pay as compensation appears to be the just compensation and the learned judge was right in not having issued the rule nisi under article 226."
23. In Ramchandra's case [1982] Lab IC 27, a Bench of the Bombay High Court has found that closure on the ground of non-availability of sugarcane which alone was the raw material for the industrial activity of the undertaking was a closure due to unavoidable circumstances beyond the control of the employer. In this judgment, however, it is said that whether in a given case, the circumstances were unavoidable, which led to the closure of the undertaking and whether these unavoidable circumstances were beyond the control of the employer, has to be determined on the facts and circumstances of that case. Such provisions of the Industrial Disputes Act which are put in Chapter V-A such as sections 25F, 25FF and 25FFF of the Act are special and they have been given effect to over any other law. It is so stated in section 25J :
"The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law including standing orders made under the Industrial Employment (Standing Orders), Act, 1946 (20 of 1946) :
Provided that where under the provisions of any other Act or rules, orders or notifications issued thereunder or under any standing orders or under any award, contract of service or otherwise, a workman is entitled to benefits in respect of any matter which are more favourable to him than those to which he would be entitled under this Act, the workman shall continue to be entitled to the more favourable benefits in respect of that matter, notwithstanding that he receives benefits in respect of other matters under this Act.
(2) For the removal of doubts, it is hereby declared that nothing contained in this Chapter shall be deemed to affect the provisions of any other law for the time being in force in any State in so far as that law provides for the settlement of industrial disputes, but the rights and liabilities of employers and workmen in so far as they relate to lay-off and retrenchment shall be determined in accordance with the provisions of this Chapter."
24. Winding up proceedings are taken up on the grounds that are spelt out under section 433 of the Companies Act. The grounds stated are :
"(a) if the company has, by special resolution, resolved that the company may be wound up by the court;
(b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;
(c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;
(d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two;
(e) if the company is unable to pay its debts;
(f) if the court is of opinion that it is just and equitable that the company should be wound up."
25. Clauses (b) and (c) above involve the act of default of a company in delivering the statutory report to the Registrar or in holding a statutory meeting and in not commencing its business within a year from its incorporation or suspending its business for a whole year. Clause (a) relates to the volition of the members of the company who by a special resolution may decide to move the court for the winding up of the company. The last clause, i.e., clause (f), is a ground where the court forms an opinion that it is just and equitable that the company should be wound up. Clause (e) is an act of bankruptcy which may be caused by such prudence of loss which the company incurred in the interest of its business as well as debts created by the mismanagement and other acts which may not be found bona fide. Consequent upon the winding-up order the steps to be taken are :
1. Intimation to the official liquidator and the Registrar, filing of the certified copy of the order within 30 days from the date of the making thereof with the Registrar by the petitioner and (2) on the filing of a certified copy of the winding up order, the Registrar to make a minute thereof in his books and notify in the official gazette that such an order has been made.
On such notification, section 445(3) of the Companies Act says "Such order shall be deemed to be notice of discharge to the officers and employees of the company except when the business of the company is continued."
26. The statutory consequence or the deemed notice of discharge upon the winding-up order has been understood as unavoidable circumstances beyond the control of the employer by some courts, but they have all taken the precaution to state that when the winding up was fraudulent or collusive, such inference may not be drawn. A question may legitimately arise when the company has sufficient assets, it has the capacity to discharged all the debts, yet, it has allowed the debts to accumulate and created a compulsion for the creditor to sue and if the ordinary civil action is not found adequate, to take recourse to a proceeding to wind up company, is it not a case in which the company itself is responsible for the adverse conditions in trade and has not given sufficient care to the business and facilitated the winding up and will it not be legitimate to infer on such facts that the company/employer itself created conditions for winding up and as a consequence of the winding up, or the closure of the company. The closure of a company as a consequence of the winding up if accepted as an unavoidable circumstance beyond the control of the employer for the purpose of giving effect to the rule in section 25FFF of the Act, which has been introduced for granting compensation to the employees who are terminated as a consequence of the closure of the undertaking in such a situation should not be accepted as an unavoidable circumstance. We cannot ignore the fact that the petitions for winding-up in most cases are based upon the failure of the employer/owners/management of the company to discharge their debts in due course of business and almost in all cases of this kind as observed in Shree Madhav Mills' case , by a learned single judge that such failures necessarily result in winding up orders. We are in agreement with what is said in Shree Madhav Mills judgment, the winding up orders in such cases must be considered as a result of financial difficulties of the companies and/or inability of the companies to discharge all their debts in due course of business. In most of the cases it would not be correct to say that a finding that because the court has intervened and passed winding up orders the undertaking is closed, the closure of the undertaking is due to or on account of unavoidable circumstances beyond the control of the employers. On the contrary, in these circumstances, the appropriate finding would be that the financial difficulties were in fact the result of the company's usual trading activities and were not on account of unavoidable circumstances beyond the control of the companies. This interpretation in our view will uphold the primacy of section 25FFF of the Act over the law that only envisaged notice of closure to the employees under section 445(3) of the Companies Act. This view will also be in consonance with the observations of the Supreme Court in the case of Payment of Wages Inspector v. Surajmal Mehta [1969] 35 FJR 232, wherein the Supreme Court has said that compensation falling under section 25FFF read with section 25F of the Act would be the wages within the meaning of section 2(vi)(d) of the Industrial Disputes Act. However, the equity in such a case will depend not on a mechanical application of the rule of thumb, if the company has been wound up and as a consequence thereof, there is a closure notice and, therefore, it is a closure on account of unavoidable circumstances beyond the control of the employer. The court in such a situation cannot act so mechanically as to forget altogether how and in what manner the employer acted in that the undertaking failed to function and collapsed in liquidation. We have until now proceeded on the assumption that the undertaking was closed as a consequence of the winding up and the retrenchment has been effected only as a consequence of the closure. Introduction of section 25O of the Act in Chapter V-A of the Industrial Disputes Act has brought a rule that before the closure, the appropriate Government or a Tribunal appointed by the Government would go into the genuineness of the cause. In a case of winding up of a company the enquiry as envisaged under section 25O of the Act may be formal in nature. Yet, there is some control and there is a mechanism to note as to why the employer has intended to close down the undertaking. Until, however, the formality under section 25O of the Act is completed, there is no closure in the eye of law. Before the Amendment Act, 45, of 1982, which introduced section 25O of the Act in the Chapter of special welfare provisions for the workmen, section 25FF of the Act alone took care of the interests of the workmen which were affected by the closure of their undertaking by their employer. The reason by the unavoidable circumstances beyond the control of the employer has got the effect of limiting the compensation payable to the employee to the average pay for three months, but it does not exclude altogether the application of section 25F of the Act which says :
"(a) the workman has been given one month's notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid, in lieu of such notice, wages for the period of the notice;
(b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days' average pay (for every completed year of continuous service) or any part thereof in excess of six months; and
(c) notice in the prescribed manner is served on the appropriate Government (or such authority as may be specified by the appropriate Government by notification in the Official Gazette)."
27. Section 25FFF of the Act as has in clause (a) of section 25F of the Act got a provision as to notice and it is obvious since compensation under section 25FFF of the Act is required to be paid in accordance with the provisions of section 25F of the Act, the required notice is to be served in the prescribed manner also to the appropriate Government or such authority as may be specified by the appropriate Government by notification in the Official Gazette. If the proviso to section 25FFF(1) of the Act is not attracted, the workman shall be paid compensation equivalent to 15 days' average pay for every completed year of continuous service or any part of thereof in excess of six months. If the proviso is attracted and if it is found that the undertaking is closed down on account of unavoidable circumstances beyond the control of the employer, the compensation amount shall be only three months' average pay. The Explanation to the above provision in section 25FFF of the Act assumes significance because financial difficulties including financial losses or accumulation of stocks or the expiry of the period of lease or licence granted to the undertaking or in a case where the undertaking is engaged in mining operations in which such 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. A glance at the grounds adumbrated for winding up in section 433 of the Companies Act was already made by us and we notice that the ground like clause (c) may not leave any opportunity for finding out whether the winding up is ordered for the reason of lapse, misconduct, etc., of the employer, but there are other grounds which may lead investigation into the facts whether the employer has acted unfairly open when a company is unable to pay its debts for the purpose of section 433 of the Companies Act is stated in section 434 of the Companies Act as follows :
"(1) A company shall be deemed to be unable to pay its debts -
(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;
(b) if execution or other process issued on a decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or
(c) if it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company.
(2) The demand referred to in clause (a) of sub-section (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by any agent or legal adviser duly authorised on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm."
28. This provision in the Companies Act gives strength to the view that there may be circumstances leading to the winding up of the company which are created by the employer only to invite action by a creditor or any other person to wind it up and if such are the circumstances leading to the winding up, to say mechanically that a notice under section 445(3) of the Companies Act is a closure notice attracting the proviso under sub-section (1) of section 25FFF of the Act may not be proper. Such people who take bankruptcy or insolvency as a stigma do not commit themselves to acts which lead to the winding up and consequential closure of the undertaking. In their case there is liquidation for reasons other than their commissions and omissions. Those, however, who do not share the above perception and act only in self-interest and thus against the public interest create situations when creditors including the Revenue, workmen and others are left to proceed against the assets of the company to recover their claims. In the course of liquidation, the Companies Act has contemplated that so long as the assets of the company are enough to meet the claims of the creditors the contributories receive nothing and it is only after all the debts are discharged that the residue is divided among the contributories. It is well-settled by now that the interest of an industry and that of the workmen in an industry is a public interest. It will in our opinion be against the public interest that even after knowing that the company has got the assets to discharge all its debts, the claim of the workmen under their respective contracts of service is reduced on the basis of the alleged closure notice pursuant to the winding up of the company.
29. The case on hand, however, is one in which whether the winding up has caused the closure and thus compensation to the workmen should be limited to the three months average pay may not detain us for long. In the instant case, it is conceded on facts that the company had stopped work, it is on record, because the financing bank stopped giving money to it, and stocks piled up, thus causing cessation of work. This happened even before the winding up proceedings started. In all fairness when the employer closed the undertaking, it was required to give the notice contemplated under section 25FFF read with section 25F of the Act. The employer, however, did not do it. Instead, he left the workmen unpaid to seek remedy elsewhere in accordance with law. It is only in the course of liquidation proceedings that the workmen came to know that the assets of the company were in the hands of the liquidator who under the Companies Act is duty bound to give notice to all the creditors. It is in such a proceeding that they have come to face with the objection to the claim of compensation in accordance with sub-section (1) of section 25FFF of the Act, that is to say in accordance with section 25F(b) of the Act, and it is contended on behalf of the employer that they shall receive compensation only under the proviso to sub-section (1) of section 25FFF of the Act. The two circumstances which led to the stoppage of work in the undertaking as stated in the proceeding are (1) financial difficulties and (2) accumulation of undisposed of stocks, which are not such unavoidable circumstances which are beyond the control of the employer.
30. In the circumstances as above, when the employer stopped the work and thus closed the undertaking before the notice under section 445(3) of the Companies Act, it is unreasonable, in our opinion, for the employer to contend that the workmen should be paid less and only in accordance with the proviso to sub-section (1) of section 25FFF of the Act. We have heard learned counsel for the appellants also to find out whether the company under liquidation has got much assets or not which shall fully cover the claim of the workmen and secured creditors and also leave no unsecured creditors unpaid and even after payment to them leave some assets as the residue for the contributories including the appellants before us. The assets of the company under liquidation in the hands of the liquidator are sufficient to cover almost all the claims of the creditors and the contributories and the appellants herein are also expected to receive some residue. When we view in this background the objection raised by the appellants to the payment of compensation to the workmen in accordance with section 25F(b) of the Act, we see it clearly that the contributories including those who are responsible for the winding up of the company alone will be benefited if the workmen are paid less compensation in accordance with the proviso to sub-section (1) of section 25FFF of the Act. The objection in the appeal, thus, are intended only to derive advantage at the cost of the public interest, that is to say, the wages which the employees are entitled to receive.
31. There is, however, one error in the impugned judgment which we think cannot be affirmed for the obvious reasons of the statutory inhibitions. The learned single judge has placed reliance on a judgment of the Supreme Court in the case of State of Kerala v. M. Padmanabhan Nair, , to say that on the wages that have remained unpaid, the employee should be paid interest at the rate of 12 per cent. per annum. The Supreme Court has considered the case of a Government servant who is entitled to pension and gratuity and has said that if the employer is found to have defaulted in the payment of pension and gratuity beyond a reasonable period of two months, the liability to pay penal interest on the dues at the current market rate would commence. There is no denial of the fact that workmen's dues in the winding up of a company have priority over all other debts along with the debts due to secured creditors to the extent that such debts rank under clause (c) of the proviso to sub-section (1) of section 529 of the Act pari passu with workmen's dues. When such dues are required to be paid by the liquidator and any interest is calculated, the rules come into operation. Rule 156 of the Companies (Court) Rules, 1959, says :
"On any debt or certain sum payable at a certain time or otherwise, whereon interest is not reserved or agreed for, and which is overdue at the date of the winding-up order, or the resolution, as the case may be, the creditor may prove for interest at a rate not exceeding four per cent. per annum up to that date from the time when the debt or sum was payable, if the debt or sum is payable by virtue of a written instrument at a certain time, and if payable otherwise, then from the time when a demand in writing has been made, giving notice that interest will be claimed from the date of demand until the time of payment."
32. This rule has put a ceiling on the rate of interest not exceeding 4 per cent. per annum from the date the sum or debt becomes payable by virtue of a written instrument and if payable otherwise, then from the time when the demand in writing has been made. Subsequently, interest, however, is again limited to the sum not exceeding 4 per cent. per annum. The interest thus granted by the learned single judge in the instant case is contrary to the law and instead of 12 per cent. as allowed by the learned single judge, it has to be limited to 4 per cent. from the date of the notice of payment up to the date of winding-up order until paid for the reasons of the aforesaid rule.
33. In the result, we find no merit in the appeals. The appeals are dismissed subject to the modification in the order as to order as to rate of interest. On the facts as above, the contributories have made themselves liable for self costs, but we are, in the instant case, not making any such order, because learned counsel appearing for the appellants has given us full and satisfactory assistance, all relevant citations and informations as and when found necessary by us and thus assisted the court in full. There shall for the said reason be no order as to costs. The hearing of this case has got almost every counsel engaged and in our view in the instant case learned counsel appearing for the liquidator should also receive adequate fee. We accordingly fix the hearing fee for him at Rs. 6,000.