Consent of Workmen is required in case of transfer of an undertaking

Supreme Court of India: Consent of Workmen is required in case of transfer of an undertaking (Establishment/Company). It is workmen’s right.

>>> The Apex Court brings about a shift in the industrial jurisprudence in relation to workmen’s rights in case of transfer of an undertaking.

Supreme Court held that workmen cannot be transferred without their consent at the time of transfer of an undertaking. If the workmen choose not to work under the new management, the workmen are required to be paid retrenchment compensation in terms of the Act.

The shift in Apex Court’s industrial jurisprudence can impact Transfer, mergers and acquisitions.

>>> Section 25F of The Industrial Disputes Act, deals with retrenchment and 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.

>>> The liability to pay the retrenchment compensation was held to be upon the Seller.
Supreme Court of India:

Bhola Nath Mukherjee & Ors vs Govt. Of West Bengal & Ors
>>>  Central Government Act

Section 25FF in The Industrial Disputes Act, 1947:

 “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.”

>>> Previously: per provisions of section 25FF: 

In case of most transfers, mergers and acquisitions where there is a change of ownership or management of an industrial undertaking, on a going concern basis, there is no variation in the terms of employment of the workmen as part of the transaction, and 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 by apex court : appears to give 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 favorable as those applicable prior to the transfer.

>>> In case the workmen loose continuity in service the resounding effect is seen in damage to statutory benefits and loss e.g; Payment of Gratuity.

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.

>>> Article 141 of the Constitution of India:

141. The law declared by the Supreme Court shall be binding on all courts within the territory of India

Thus 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.

Therefore as an effect the Acquirers and Sellers in any merger or acquisition involving a change in management or ownership of an undertaking may have 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.

>>> This is marked shift from earlier decision of Apex Court.

As earlier, 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.

e.g. Supreme Court of India
Management of R.S. Madhoram & Sons (Agencies) (P) Ltd. Vs Its Workmen
Held: Industrial Dispute-Transfer of workmen and business-Business
not separate-If transfer valid-Industrial Disputes Act, 1947
(14 of 1947), s. 25FF.

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 provision to this section which excludes its operation in respect of cases falling under the provision. The provision in substance lays down that the 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 favorable 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 provision, therefore, shows that where the transfer does not affect 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 section: 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 section;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…”

>>>  "A phrase begins life as a literary expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, indiscriminatingly used to express different and sometimes contradictory ideas."

“plea of illegality of transfer was not spelt out in so many words in the reference that was the core issue”

The basic issues involved in the cases are as follows:

1. Was there a transfer of undertaking under Section 25FF of the Act?
2. Was this transfer vitiated by fraud?
3. Is consent of the employees required in a case of transfer of undertaking under Section 25FF?

Again the position in case of  Management of R. S. Madhoram And Sons Agencies (P) Ltd. v. Its Workmen. (1963 (5) SCR 377),  was held and was highlighted as follows:-……………………

…………. The views according to us reflect the correct position in law…………. in case of ;

Supreme Court of India Management, Mettur Beardsell Ltd vs. Workmen Of Mettur Beardsell Ltd. & ... on 26April, 2006

>>> The employees of Hotel Agra Ashok filed a writ petition being No. 41650 of 2001 in the Allahabad High Court questioning the action of the first respondent - India Tourism Development Corporation (hereinafter called 'the ITDC'), New Delhi to sell Hotel Agra Ashok out rightly to a private party as arbitrary and illegal.

One of the arguments by the Workers Union citing the House of Lords decision in Nokes v. Doncaster Amalgamated Collieries Ltd. (1941) 11 Comp Case 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.

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…………….

Supreme Court of India:
All IndiaItdc Workers Union & Ors vs Itdc & Ors
On 31October, 2006
Author: . A Lakshmanan Bench: Dr. Ar. Lakshmanan, A.K. Mathur

>>> The shift in Apex Court’s industrial jurisprudence is seen in following case and the apex court laid decided that:

“We are satisfied that the appellants-

workmen have made out a case for interference by this Court.

Accordingly, we direct the respondent-Philips India Ltd. to comply with the directions made by the learned single Judge vide order dated 08.10.2001”

The details are as following:

1) Leave granted.
2) These appeals are directed against the final judgments

And orders dated 20.06.2008 and 25.08.2008 passed by the High Court at Calcutta in CPAN No. 539 of 2002 and MAT No. 519 of 2008 respectively whereby the High Court dismissed the contempt application and the appeal filed by the appellants herein - employees/workers of Philips India Ltd.

3) Brief facts:

(a) The appellants are the employees/workers of Philips India Ltd. (in short `the Company') having its Registered office at No. 7, Justice Chandra Madhab Road, Calcutta and its Consumer Electronics Factory at Salt Lake City, Calcutta. In the year 1997, the Company introduced Voluntary Retirement Scheme (in short "VRS") for its workmen and majority of them opted for and accepted the same. On 30.09.1998, the Company entered into an Agreement for Sale of its Consumer Electronics Factory at Salt Lake City with Kitchen Appliances India Limited, a subsidiary of Videocon International Ltd. as a going concern together with all assets and liabilities.

Vide letter dated 12.10.1998, the Company informed the Secretary of Workers' Union about having signed the agreement and also withdrew the Voluntary Retirement Scheme (VRS) launched in the year 1997.

For effecting transfer, the Company circulated a Notice for Extra-ordinary General Meeting of its share holders and circulated a Proposed Resolution under Section 293 of the Companies Act, 1956. On 16.11.1998, the Workers' Union filed an application under Section 10(2) of the  Industrial Disputes Act, 1947 (in short `the Act') for referring the dispute to Court of Enquiry, Labour Court/Tribunal.

(b) On 01.12.1998, a Suit being Civil Suit No. 483 of 1998 was instituted in the High Court at Calcutta by two Employees' Unions in representative capacity against the proposed resolution to be passed at the extra-ordinary general meeting of the Company.

Vide order dated 16.03.1999, the learned single Judge of the High Court passed an order of injunction restraining the Company from giving effect to the said Resolution and to the Agreement for Sale dated 30.09.1998.

Being aggrieved by the order of the learned single Judge, the Company filed an appeal being APO No. 230 of 1999 before the Division Bench of the High Court. Vide order dated 13.09.1999, the Division Bench allowed the appeal filed by the Company. Thereafter, employees' unions filed SLP (C) No. 14274 of 1999 before this Court which was dismissed by this Court on 15.10.1999. Against the same, Review Petition No. 1585 of 1999 was filed which was also dismissed.

(c) On 22.12.1999, both the Company and Kitchen Appliances India Ltd. 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 the Kitchen Appliances India Ltd 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.

Workers' Union filed two title suits being T.S. Nos. 788 and 795 of 1999, inter alia, praying for declaration and permanent injunction restraining the Company from giving effect to notice dated 22.12.1999. On 29.12.1999, the Workers' Union addressed a letter to the Company submitting their strong protest against the transfer and also stating that the Company has been restrained to give effect to the said notice in view of order dated 23.12.1999 passed by the Civil Judge (Junior Division) at Sealdah in Title Suit No. 795 of 1999.

(d) Workers' Union filed Writ Petition No. 2275 of 1999 before the High Court for early disposal of workers' application for a reference. Vide order dated 19.09.2000, 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. On 13.12.2000, Labour Department, Government of West Bengal 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.

Aggrieved by the said decision, the Workers filed a Writ Petition being No. 12125 of 2001 before the High Court. Vide order dated 08.10.2001, the writ petition was disposed off with a direction to pay retirement/retrenchment benefits to the workers.

Contempt Application being No. 539 of 2002 was filed by the workers, inter alia, alleging violation of the order dated 08.10.2001 which was dismissed by the single Judge of the High Court on 20.06.2008. On 21.07.2008, the workers filed MAT No. 519 of 2008 before the Division Bench of the High Court which was also dismissed vide order dated 25.08.2008.

(e) Being aggrieved, the Workers' Unions have filed these appeals before this Court by way of special leave petitions.

5) The point for consideration in these appeals is whether the workmen are entitled to the benefit of the order dated 08.10.2001 passed by the learned single Judge of the High Court, particularly, in the absence of any appeal or challenge before the higher forum by the Management?

6) It is the specific case of the appellants-workmen that when the Company informed the workmen about the transfer of ownership of Consumer Electronics Factory at Salt Lake City, to Kitchen Appliances India Ltd., the said move was not acceptable by the appellants-workers and they refused to give their consent………………..

On 29.12.1999, on behalf of the declined employees, their Union raised a dispute regarding transfer of ownership of the Company without their consent as illegal…..

… Even on 13.12.2000, Labour Department, Government of West Bengal declined the reference. On 06.03.2001, the workers asked for VRS from Philips India Ltd. alleging that they do not wish to join the new employer….

7) On 08.10.2001, the learned single Judge of the High Court disposed of the writ petition with a direction to the respondent-Management for payment of retirement and retrenchment benefits to the workers. Inasmuch as the workers very much relied on the order of the learned single Judge dated 08.10.2001, it is useful to refer to the directions made therein. While declining to interfere with the order of rejection made for reference, the learned single Judge of the High Court issued the following directions:

"However, the petitioners shall be entitled to all retirement benefits with effect from the date of approval of the undertaking to Kitchen Appliances Ltd. and Philips India Limited 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."

8) It is not in dispute that the order was passed by the learned single Judge on 08.10.2001 after hearing the counsel for the petitioners therein (Workers) and the respondent therein (Management) including the Government counsel. It is also not in dispute that the said order has become final since neither the Management nor the Government challenged the same before the Division Bench of the High Court or in this Court.

9) Now, let us consider whether the said order dated 08.10.2001 is acceptable or not. Inasmuch as while rejecting the challenge made to refer the matter for adjudication before the Labour Court/Tribunal, the learned single Judge, in order to protect and safeguard the interests of the workmen, issued such directions taking note of various aspects including several safeguards provided in the Act and also the payment of compensation in case of transfer of an undertaking. No doubt, the Management raised an objection that these workmen neither availed the VRS within the stipulated time nor retired/retrenched from the service due to the transfer of ownership of the Company. 

It is true that the appellants-

Wworkers did not avail both the conditions. But at the same time, it is not in dispute and it cannot be disputed that these workmen resorted to several remedies such as filing a suit, making representation to the Management as well as to the officers of the Labour Department for consultation and consideration and finally to the Government for referring the matter to the Labour Court/Tribunal for adjudication. After several attempts, these workmen filed Writ Petition before the High Court. The learned single Judge of the High Court has taken note of proposal for transfer between Philips India Ltd. and Workers' Union and all other subsequent events including the fact that the Company launched VRS to its employees who did not opt to Kitchen Appliances India Ltd. After noting that the dispute was sought to be raised but the appropriate government declined to refer the same, the learned single Judge, after considering the rival contentions of the workmen and the Management, declined to interfere with the impugned order therein and dismissed the same.

However, the learned single Judge, taking note of the fact that the workmen did not give their consent for change of management, issued a positive direction about the settlement of retirement benefits with effect from the date of approval of the undertaking to Kitchen Appliances Ltd. and directed the Company to pay all such retirement benefits payable to the employees as per normal rules and conditions of service including the retrenchment benefits within six months.

We have already referred to the admitted fact that the said order was passed as early as on 08.10.2001 and has become final.

10) 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 Ltd., to comply with the same.

We are also satisfied that the learned single Judge was conscious of the fact that these workmen failed to avail the VRS within the stipulated time and also did not retire from the service.

However, taking note of the fact that the workmen cannot be compelled to join the transferee company against their wish and without their consent and all along fighting for their cause in various forums such as Civil Court, Labour Court, the Government and the High Court and even in this Court, we are of the view that the learned single Judge was fully justified in passing such order.

11) A perusal of the directions passed by the learned single Judge leaves no room for doubt that a mandatory duty was cast upon respondent Nos. 1 & 2 to comply with the same.

In such circumstances, it is highly improper on the part of the Management now to turn around and to contend that since the appellants-workmen had neither been retired nor resigned nor retrenched from service, as such, there is no question of any payment or to comply with the directions passed by the learned single Judge.

12) The entire genesis of the contempt application pertains to violation of order dated 08.10.2001 passed by the learned single Judge of the High Court.

We are satisfied that the said order was passed by the learned single Judge after hearing all the parties in the nature of mandatory directions to respondent Nos. 1 & 2. The High Court, in the impugned order, instead of dismissing the contempt application ought to have directed the respondents to implement the order dated 08.10.2001 passed by the learned single Judge.

13) In view of the above, we are satisfied that the appellants-workmen have made out a case for interference by this Court.

Accordingly, we direct the respondent-Philips India Ltd. to comply with the directions made by the learned single Judge vide order dated 08.10.2001, which we have quoted in earlier paragraphs, within a period of three months from the date of the receipt of this judgment.

14) The civil appeals are allowed on the above terms. No order as to costs.

.................................................J.
(P. SATHASIVAM)

...............................................J.
(J. CHELAMESWAR) NEW DELHI;

NOVEMBER 18, 2011.
Supreme Court of India
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOs. 9921-9922 OF 2011
(Arising out of SLP (C) Nos. 11115-11116 of 2009
Sunil Kr.Ghosh & Ors vs K.Ram Chandran & Ors on 18November, 2011
Author: P Sathasivam
Bench: P. Sathasivam, J. Chelameswar

>>> This it becomes unavoidable for the entities looking for transfer, merger, and acquisition to do the needful to avoid risks arising from the above Judgment.

The Seller entity should provide notice of transfer of their establishment 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.

Te buyer entity should include indemnity provision in its agreement with seller to recover/ 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.

The buyer/acquirer should include express statements, in line with essence of Section 25FF of the Industrial Disputes Act:

That:

a. 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

b. The service of the workman shall not been interrupted by the transfer

c. 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.

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