Right To Shut Down Business/Closure Of Undertaking – Industrial Disputes Act, 1947

Does an employer have a legitimate right to close a business? This issue was recently analysed by the Hon'ble Supreme Court in the matter of Harinagar Sugar Mills Ltd. (Biscuit Division) & Anr. vs State of Maharashtra & Ors [2025 INSC 801] ("HSML Case"), where the Apex Court held that Article 19(1)(g) of the Constitution includes the right to shut down a business but subject to reasonable restrictions. The Supreme Court has also elucidated on the requirements under Section 25-O (procedure for closing down an undertaking) of the Industrial Disputes Act, 1947 ("ID Act").

Background

• Harinagar Sugar Mills Limited (Biscuit Division) ("HSML") was exclusively engaged in biscuit manufacturing for Britannia Industries Limited ("BIL") under Job Work Agreements ("JWA") extended from time to time.

• After 32 years of the arrangement, BIL terminated the JWA giving the required notice. Consequently, HSML applied to the competent authorities for closure of undertaking under Section 25-O of the ID Act on August 26, 2019.

• The Deputy Secretary, Government of Maharashtra vide letter dated September 25, 2019 informed HSML that they (i) failed to disclose their efforts to prevent closure; and (ii) had not given 'cogent reasons' for disclosure. HSML was therefore asked to 'resubmit' their application.

• On October 10, 2019, HSML provided the background of its arrangement with BIL (which included provision of raw material and machinery by BIL itself) as also its efforts to prevent closure by way of approaching other companies.

• The authorities found the response lacking and on November 4, 2019, communicated that the response did not cover all aspects (absorption of employees into other divisions and moving to other manufacturing avenues). HSML was once again asked to resubmit their application.

• On November 22, 2019, HSML contended that they were deemed to have been granted permission for closure in view of Section 25-O(3) of the ID Act, where on the failure of the 'appropriate Government' to communicate the 'order' granting/refusing permission for closure within 60 (sixty) days of the date on which application is made, permission is deemed to have been granted on expiration of the stipulated period.

• The Deputy Commissioner vide letters dated November 20 and November 22, 2019 inter alia stated the State Government had not yet granted permission.

Questions before the Supreme Court

The questions before the Court were:

1. Whether the Deputy Secretary, Government of Maharashtra's letter dated September 25, 2019 constituted an order and connectedly, was HSML entitled to relief of deemed closure; and

1. Meaning of the phrase 'appropriate Government' and whether in the HSML Case, it was the 'appropriate Government' which was acting.

Court Ruling

The Court noted/held that:

• the powers under Section 25-O of the ID Act vested with the Minister for Labour and there was nothing on record to show that the Deputy Secretary was duly authorised to deal with applications for closure under the ID Act;

• the order under Section 25-O of the ID Act being an administrative order needs to reflect an application of mind and administrative authorities are required to give reasons for the decision;

• endorsement of the view taken by an undisclosed officer of the Ministry cannot be said to be application of mind by the competent authority when the Minister is the sole authority;

• the State Government's contention that internal noting showing that the file had travelled up to the Minister, and any action pursuant to the Minister's approval was in accordance with law was not accepted as (i) the Deputy Secretary had no authority; and (ii) internal noting cannot be relied upon to establish compliance with procedure.

The Court held that the letter dated September 25, 2019 cannot be considered as an 'order' as it:

1. was without any authority since it was not the 'appropriate Government' acting;
2. suffered from vice of non-application of mind by the competent authority, and the competent authority (Minister) did not consider the matter independently.

Thus, the Court held that the appropriate Government failed to make and communicate any order and deemed closure to have come into effect. The Court also held that the reasoning furnished by the Deputy Secretary appears to have been given with the sole purpose of rejecting the application without due application of mind as the reasons given by HSML showed compelling circumstances for closure in view the facts surrounding the case, particularly HSML's reaching out to other companies.

The Court further noted that Article 19(1)(g) includes the right to shut down a business but subject to reasonable restrictions. Basis the judgement in Orissa Textilesand Steel v.State of Orissa¹, the Court also deduced the scope of Section 25-O as follows:

1. the right to close the business is subject to the interest of the general public;
2. any application seeking permission for closure must disclose adequate and genuine reasons which the authority has to have regard for;
3. in certain cases, however, even if the reasons are genuine and adequate, it does not mean that permission to close ought to be granted;
4. if it is found that the reasons are generally adequate, and despite that the appropriate Government decides for refusal of permission of foreclosure, then the interest of the general public involved in that particular case must be "compelling" and "overriding"; and
5. financial difficulty on its own cannot constitute the reason for shutting down the business. An employer must demonstrate exceptional circumstances or an impossibility of running the business.

Comments

Closure of business in India is a sensitive and volatile issue, and owners often struggle to shut down the shutters despite severe hardship in continuation. This right has been recognised as part of Article 19(1)(g) of the Constitution but subject to adherence of restrictions discussed above. The ID Act has stipulated the requirements for closure of an undertaking and the Supreme Court has highlighted the scope for such closure, and importantly, that the competent authority is expected to act in accordance with the law and with due application of mind.

Footnote

1. (2002) 2 SCC 578

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