Home » Case Note » Consent of Workmen for Transfer of Undertaking – The Supreme Court Strikes New Ground in Industrial Jurisprudence

Consent of Workmen for Transfer of Undertaking – The Supreme Court Strikes New Ground in Industrial Jurisprudence

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Rohit Das  

I.          Introduction

On 18 November 2011, the Supreme Court of India delivered its judgment in Sunil Kr. Ghosh v. K. Ram Chandran, Civil Appeal Nos. 9921-9922 of 2011 arising out of SLP (C) Nos. 11115-11116 of 2009 (the “Judgment”). The Judgment appears to mark a shift in the Supreme Court’s industrial jurisprudence in relation to workmen’s rights in case of transfer of an undertaking and has the potential to impact mergers and acquisitions in India.

II.         Applicable Statutory Provisions

Section 25FF of the Industrial Disputes Act, 1947 (the “Act”) provides that: “Where the ownership of management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to or that undertaking to a new employer, every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched :

Provided that nothing in this section shall apply to a workman in any case where there has been a change of employers by reason of the transfer, if-

(a) The service of the workman has not been interrupted by such transfer;

(b) The terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer; and

(c) The new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.”

As a result in most mergers and acquisitions where there is a change of ownership or management of an industrial undertaking on a going concern basis and there is no variation in the terms of employment of the workmen as part of the transaction, there was no requirement to obtain consent of workmen or to pay retrenchment compensation to any workman who did not wish to continue working under the new management. However, the Judgment appears to strike out in a new direction by holding that workmen cannot be forced to work under a new management even when the terms of employment under the new management are no less favourable as those applicable prior to the transfer.

III.        Facts of the Case

Philips India Limited (“Philips”) entered into an Agreement for Sale for the sale of its Consumer Electronics Factory at Salt Lake City as a going concern together with all assets and liabilities to Kitchen Appliances India Limited (“KAIL”), a subsidiary of Videocon International Limited (the “Agreement”). The Workers’ Union was opposed to the Agreement of Sale and they filed an application under Section 10(2) of the Act for referring the dispute to the Labour Court/Tribunal (the “Application for Reference”). The Workers’ Union had also filed a writ petition before the Calcutta High Court for early disposal of the Application for Reference. Vide order dated 19 September 2000, the writ petition was disposed off with a direction to the Labour Commissioner to pass necessary order either in terms of Sections 12(4) or 12(5) of the Act.

A suit was instituted in the High Court at Calcutta by two Employees’ Unions in representative capacity against the Agreement for Sale. On 16 March 1999, a single Judge of the High Court passed an order of injunction restraining Philips from giving effect to the Agreement for Sale. Philips filed an appeal before the Division Bench of the High Court, which allowed the appeal and set aside the order of the single Judge on 13 September 1999. Thereafter, the Employees’ Unions filed Special Leave Petition before the Supreme Court of India which was dismissed 15 October 1999, against which a Review Petition was also filed, and which was also dismissed. Thereafter, on 13 December 2000, the Labour Department, Government of West Bengal rejected the Application and refused to refer the dispute for adjudication by observing that the interests of the workmen are in no way affected due to transfer of ownership (the “Refusal Order”).

On 22 December 1999, both the Company and KAIL issued a notice informing the employees that consequent upon transfer of ownership of the Consumer Electronics Factory, the employment of all the workmen has been taken over by KAIL with immediate effect and their services will be treated as continuous and not interrupted by the transfer of ownership and the terms and conditions of services will not be in any way less favourable than those applicable immediately prior to the transfer of ownership.

 

The Workers’ Union strongly protested against the transfer and filed two title suits praying for declaration and permanent injunction restraining Philips and KAIL from giving effect to notice dated 22 December 1999 and even obtained a restraining order dated 23 December 1999 from the Civil Judge (Junior Division) at Sealdah. The Workers’ Union also filed a writ petition before the Calcutta High Court challenging the Refusal Order of the Labour Department, Government of West Bengal. While declining to interfere with the Refusal Order, a single Judge of the Calcutta High Court issued the following directions on 8 October 2001: “However, the petitioners shall be entitled to all retirement benefits with effect from the date of approval of the transfer of undertaking to KAIL and Philips shall pay all such retirement benefits payable to the employees within six months from this date. Such benefits will be given as per normal rules and conditions of service including the retrenchment benefit. Such benefits shall be available to the employees upto the date of approval. With the aforesaid observations, this writ application is disposed of.”

Upon Philips failing to pay the retrenchment/retirement compensation, the Workers’ Union filed a Contempt Application alleging violation of the order dated 8 October 2001 which was dismissed by the single Judge of the High Court on 20 June 2008. On 21.07.2008, the workers appealed before the Division Bench of the High Court which was also dismissed vide order dated 25 August 2008. Aggrieved by the orders of the High Court, the workers preferred Special Leave Petitions before the Supreme Court of India.

IV.        The Judgment

In its Judgment, the Supreme Court took cognizance of the fact that these workmen neither availed the Voluntary Retirement Scheme offered by Philips within the stipulated time nor retired/retrenched from the service due to the transfer of ownership of the undertaking. Further, it was an admitted position that their services were to be treated as continuous and not interrupted by the transfer of ownership and the terms and conditions of the workmen’s service would not be in any way less favourable than those applicable immediately prior to the transfer of ownership.

However, the Supreme Court in its Judgment held that: “It is settled law that without consent, workmen cannot be forced to work under different management and in that event, those workmen are entitled to retirement / retrenchment compensation in terms of the Act. In view of the same, we are of the view that the workmen are entitled to the benefit of such direction and it is the obligation on the part of the Management- Philips India Limited, to comply with the same.”

V.         Analysis of the Judgment      

While the tone of the Judgment was set by the fact that Philips had ignored the binding order of the Calcutta High Court dated 8 October 2001 and failed to comply with the same without appealing to higher authorities, the Supreme Court did go into the merits of the matter and held that workmen cannot be transferred without their consent at the time of transfer of an undertaking and that if the workmen choose not to work under the new management, they are required to be paid retrenchment compensation in terms of the Act. With respect, it is submitted that the Judgment of the Supreme Court of India is per incurium as it goes against the express provisions of Section 25FF of the Act which expressly states that prior notice of transfer of an undertaking and payment of retrenchment compensation would not be required if:

(a) The service of the workman has not been interrupted by such transfer;

(b) The terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer; and

(c) The new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.

In fact, the Judgment goes against the Supreme Court’s own decisions touching upon the subject. In Management of R.S. Madhoram and Sons Agencies (P) Ltd. v. Its Workmen, AIR 1964 SC 645, the Supreme Court observed that:

“9. Section 25FF of the Act provides, inter alia, that where the ownership or management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to that undertaking to a new employer, every workman who satisfies the test prescribed in that section shall be entitled to notice and compensation in accordance with the provisions of s. 25FF as if the workman had been retrenched. This provision shows that workmen falling under the category contemplated by it, are entitled to claim retrenchment compensation in case the undertaking which they were serving and by which they were employed is transferred. Such a transfer, in law, is regarded as amounting to retrenchment of the said workmen and on that basis s. 25FF gives the workmen the right to claim compensation.

10. There is, however, a proviso to this section which excludes its operation in respect of cases falling under the proviso. In substance, the proviso lays down that the provision as to the payment of compensation on transfer will not be applicable where in spite of the transfer, the service of the workmen has not been interrupted. The terms and conditions of service are not less favourable after transfer then they were before such transfer, and the transferee is bound under the terms of the transfer to pay to the workmen in the event of their retrenchment, compensation on the basis that their service had been continuous and had not been interrupted by the transfer. The proviso, therefore, shows that where the transfer does not effect the terms and conditions of the employees, does not interrupt the length of their service and guarantees to them payment of compensation, if retrenchment were made, on the basis of their continuous employment, then s. 25FF of the Act would not apply and the workmen concerned would not be entitled to claim compensation merely by reason of the transfer. It is common ground that the three conditions prescribed by clauses (a) (b) and (c) of the proviso are satisfied in this case and so, if s. 25FF were to apply, there can be little doubt that the appellant would be justified in contending that the transfer was valid and the 57 employees can make no grievance of the said transfer…”

The passages from the judgment quoted above were again relied upon by the Supreme Court in Management, Mattur Beardsell Ltd. v. Workmen of Mattur Beardsell Ltd., AIR 2006 SC 2056, where the Supreme Court quoted the above passages and held that “9. The views according to us reflect the correct position in law”.

In All India ITDC Workers Union v. ITDC, AIR 2007 SC 301, pursuant to the disinvestment policy of the Government of India, the decision was taken to transfer Hotel Agra Ashok to Mohan Singh and Yamuna View Private Limited. The Workers Union challenged the transfer decision. One of the arguments by the Workers Union citing the House of Lords decision in Nokes v. Doncaster Amalgamated Collieries Ltd. (1941) 11 Comp Cas 83 was that a free citizen in exercise of his freedom is entitled to chose the employer whom he promises to serve, so that the right to his services cannot be transferred from one employer to another without his consent. The Workers Union demanded that a voluntary retirement scheme providing for adequate compensation be made available to the employees.

In rendering its decision, the Supreme Court referred to the documents entered into for effecting the transfer of the undertaking from ITDC to the Acquirer, including the Share Purchase Agreement and the Demerger Scheme. The Supreme Court noted Clause 9.4 of the Share Purchase which stated:

9.4 The Purchaser will cause the Company to continue to employ all the regular employees of the Unit which have been transferred to the Company on the terms and conditions that shall not be inferior to the terms and conditions as applicable to the regular employees on the date of transfer of the Unit including with respect to the voluntary retirement scheme applicable to the Company as per the guidelines of the Department of Public Enterprises, if any, and terms set out in agreements entered into by ITDC in relation to such regular employees with staff/workers unions/associations. The Purchaser further covenants that it shall cause the Company to ensure that:

(i) the services of the regular employees will not be interrupted.

(ii) the terms and conditions of service applicable to the regular employees will not in any way be less favourable than those applicable to them immediately on the date hereof.

(iii) it shall not retrench any of its regular employees for a period of one year from the Closing Date other than any dismissal or termination of regular employees from their employment in accordance with the applicable staff regulations and standing order of the Company or applicable law.

(iv) in the event of retrenchment of regular employees, the Company shall pay the regular employees such compensation as is required under applicable labour laws on the basis that the service of the regular employees have been continuous and uninterrupted. Provided further, that no retrenchment of an Employee would be undertaken unless the affected Employee is given benefits which are higher of (a) the voluntary retirement scheme applicable to the Company as per the guidelines of the Department of Public Enterprises as of the date hereof and (b) the benefits/compensation required to be statutorily given to an employee under applicable law.

(v) the Company will only undertake dismissal or termination of the services of the employees on account of disciplinary action in accordance with the applicable staff regulations.

(vi) in respect of contract employees the terms and conditions of the relevant contracts shall be fully observed by the Company and the Purchaser shall keep Government and ITDC indemnified against damages, losses or claims resulting on account of the Company failing to observe any of the terms and conditions of such contracts.

The Supreme Court also noted Clause 3.2 (d) of the Demerger Scheme which stated that:

With effect from the Appointed Date, all employees of the Transferor engaged in the Transferred Undertaking shall become the employees of the Transferee on the terms and conditions on which they are engaged as on the Appointed Date by the Transferor without any interruption of services as a result of this Scheme. The Transferee agrees that the services of all such employees with the Transferred Undertaking upto the Appointed Date shall be taken into account for purposes of all retirement benefits to which they may be eligible in the Transferor on the Appointed Date.” We have given our thoughtful consideration to the rival submissions made by the respective counsel appearing for the respective parties. In our opinion, the present writ petitions filed by the employees merits to be dismissed”.

Based on the above, the Supreme Court held that: “we have given our thoughtful consideration to the rival submissions made by the respective counsel appearing for the respective parties. In our opinion, the present writ petitions filed by the employees merits to be dismissed”. The Court observed that “the safeguards regarding the service conditions of the employees have been duly provided in the transfer documents i.e., Demerger Scheme and Share Purchase Agreement”. The Court further opined that the Respondents (ITDC and the Acquirers) are under no obligation to float the voluntary retirement scheme because retirement compensation has to be given only when the company retrenches its regular employees, “but here the company is ready to continue with its employees with the same terms and conditions mentioned in the share purchase agreement. The employees are unwilling to continue on the same terms and, therefore, they cannot compel the management to introduce VRS scheme”. The Court further observed that: “The Government could have run the industry departmentally or in any other form. When it chooses to run an industry by forming a company and it becomes its shareholder then under the provisions of the Companies Act as a shareholder, it would have a right to transfer its shares. When persons seek and get employment with such a company registered under the Companies Act, it must be presumed that they accept the right of the directors and the shareholders to conduct the affairs of the company in accordance with law and at the same time they can exercise the right to sell their shares.” The Court also noted that all the liabilities of the undertaking, including liabilities towards employees are being transferred and therefore the interests of the employees are adequately protected in the disinvestment process. Therefore, the Supreme Court held that: “for the foregoing reasons, we hold that there is absolutely no merit or substance in the contentions raised by learned senior counsel for the petitioners. The writ petitions are, therefore, liable to be dismissed and the policy decision taken by the Government of India to transfer the Hotel Agra Ashok to M/s Mohan Singh and Yamuna View Private Limited cannot be assailed at the instance of the employees.”

VI.        Impact of the Judgment on Mergers and Acquisitions

Article 141 of the Constitution of India provides that the law declared by the Supreme Court shall be binding on all courts within the territory of India. The Judgment may in effect require the Acquirers and Sellers in any merger or acquisition involving a change in management or ownership of an undertaking to seek prior consent from workmen, who have the right not to consent to such transfer, in which case they will be entitled to retrenchment compensation in terms of Section 25F of the Act.

Section 25F of the Act provides for the amount of retrenchment compensation to be paid at the time of retrenchment. The compensation should be equivalent to fifteen days’ average pay of the workman for every completed year of continuous service or any part thereof in excess of six months.

Further, the Payment of Gratuity Act, 1972 (“Gratuity Act”) requires entities with ten or more employees to pay gratuity benefit to their employees who have completed five years of continuous service, at the time of termination of employment. Section 4(2) of the Gratuity Act provides the method for calculation of the amount of gratuity. It states: “(2) For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days’ wages based on the rate of wages last drawn by the employee concerned: Provided that in the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account: Provided further that in the case of an employee who is employed in a seasonal establishment and who is not so employed throughout the year, the employer shall pay the gratuity at the rate of seven days’ wages for each season. Explanation: In the case of a monthly rated employee, the fifteen days’ wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen.” Further, Section 4(3) of the Gratuity Act provides that: “(3) The amount of gratuity payable to an employee shall not exceed ten lakh rupees”. In brief, the amount of gratuity is to be calculated according to the following formula:

[Monthly Wages x 15 days x (Number of years of service + part thereof exceeding 6 months)]/ 26

Subject to an upper cap of Rs. 10,00,000/- for each workman.

VII.       Recommendations for Acquirers

The following steps may be taken by Acquirers in any proposed merger or acquisition transaction to mitigate the risks arising from the above Judgment:

(i)     Express Stipulation in Transaction Documents:

To avoid any ambiguity, Acquirers should be careful in expressly stipulating the three conditions prescribed in the proviso to Section 25FF of the Act; namely; (a) The service of the workman shall not been interrupted by the transfer; (b) The terms and conditions of service applicable to the workman after such transfer shall not in any way be less favourable to the workman than those applicable to him immediately before the transfer; and (c) The new employer shall be liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.”

(ii)   Condition Precedent:

Acquirers may include a provision in the documentation for a proposed merger/acquisition transaction as a condition precedent to closing, the Seller shall provide notice of transfer of their undertaking to all its workmen at least 30 (thirty) days prior to the date of closing and shall provide no-objection certificates/consent letters from each of workmen consenting to continue with their employment.

(iii)  Adequacy of Consideration:

Acquirers may include a statement in their documentation that the purchase price paid to the Seller includes and is adequate to pay any retrenchment compensation payable to workmen as a result of the transfer of the undertaking. In Bhola Nath Mukherjee v. Government of West Bengal, (1997) 1 SCC 562, the Supreme Court held that the workmen were entitled to retrenchment compensation as their service was interrupted during the transfer of the undertaking. However, it held that the Acquirer did not have any obligation to pay the retrenchment compensation as the consideration paid by the Acquirer to the Seller was sufficient to pay any retrenchment compensation. Therefore, the liability to pay the retrenchment compensation was held to be upon the Seller.

(iv)  Price Adjustment Clause/Indemnity:

Acquirers may also include a provision which would allow the Acquirer to adjust the liability for payment of gratuity and retrenchment compensation to workmen who decide to terminate their employment as a result of the change in management, from the purchase price agreed with the Seller or an indemnity provision that would allow the Acquirer to recover such liability from the Seller.

 

 

 

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2 Comments

  1. hello says:

    Hi Rohit,

    you may like to read the following judgment:
    MANU/GJ/0972/2008
    [2011]161CompCas627(Guj)

    let me know whether you would change your view based on the reasoning given in the aforementioned judgment.

  2. The Proviso to 25FF applies only if – I stress ‘only if’ – the workman concerned joins the new establishment or under the new management with ‘free consent’. In that event, he cannot claim retrenchment benefits etc. in addition to what he is already receiving in the new establishment or under the new management. That is the only correct interpretation of the statute which unfortunately the Apex Court did not do until recently – as a result the fates of millions of workmen were jeopardized and many lives ruined – and it is heartening to know and see that at least in this judgment the Supreme Court has categorically stated: “It is settled law that without consent, workmen cannot be forced to work under different management and in that event, those workmen are entitled to retirement / retrenchment compensation in terms of the Act. In view of the same, we are of the view that the workmen are entitled to the benefit of such direction and it is the obligation on the part of the Management- Philips India Limited, to comply with the same.” Truly workmen are not chattel or slaves – I emphasize ‘not chattel or slaves’ – to be transferred at will by the managements. For the oppressor and exploiting managements 25FF itself has come as a boon – if they were to retrench or close the establishment otherwise they would face so many legal hurdles. For any closure prior notice is necessary and for closure of an industry with more than 100 (or 300 as the case may be) workmen govt’s approval after long prior notice is a must. But all these are circumvented by resort to so-called transfer of management or ownership, which in many cases, are nothing but ruses to get rid of ‘unwanted’ workmen and deny the workmen their normally due wages and benefits and wriggle out of other commitments.

    I have a case in hand where Express Publications (Madurai) Ltd. has successfully cheated its workers by ‘transferring the management/ownership’ of Andhra Prabha Publications and got rid of its ‘unwanted workmen’ through such fraudulent transfer. The new ownership/management treated the transferred workers so shabbily and harshly and the laws/courts and their processes were/are so cumbersome and ineffective that out of the 150 or so transferred more than 110 had to resign in sheer despair and the other 30-40 are kept in illegal lockout for years together and now all their cases (of such as those who could approach) are in the High Court which does not have time to dispose of such labour problems in earnest.

    As such a Madras High Court Judge had wisely and correctly stressed in one judgment years back that a tripartite accord (between the recognised union, transferer and transferee) as per Section 18(3) of the ID Act is a must – I stress MUST – for any valid transfer of establishment to bind the workmen to the transfer and making it obligatory for them to go and join the new management or ownership. Otherwise in the absence of such valid tripartite accord, the transfer of workman depends mainly on the consent of the individual workman freely given and in any case he refuses to give or is duped to join, he would be entitled to all the benefits or dues contemplated in the main part of 25 FF.

    So the law is at last correctly interpreted by the Supreme Court in this judgment discussed above and hope another bench will not reverse it in these days of rabid and inhuman capitalist globalization and privatization.

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