Excel Wear Case: A Company Law Perspective
By Sahil Shah,
As the legal process causes birth of a company, so is its death. In several ways, a company's life may be brought to an end. The right of the members to pass a resolution to wind up the company cannot be taken away by any of the provisions in the article nor can it be interfered with by the Court through an injunction or otherwise. It is a statutory right of the members of the company. However, this right was curtailed unreasonably and arbitrarily through the impugned provisions Sections 25-O & 25-R of the Industrial disputes Act, 1947 whereby the government was empowered to refuse an application for closing down the business without even recording reasons for the same. Hence these impugned provisions were challenged in Excel Wear v. Union of India.
The Excel Wear case is related to the right of closure of business (whether closure of business could be refused merely on the ground that the workers would become unemployed) and compensation to the workers on closure of the business. Though, the concept of voluntary winding up has not been expressly stated in this case, members’ voluntary winding up is obviously a part of the right of the employer to close his business. Hence in this article, it has been my endeavour to analyse the Excel Wear case in a company law perspective.
In this case, four writ petitions challenging the constitutional validity of Ss. 25-O and 25-R of the Industrial Disputes Act, 1947 (hereinafter ‘the Act’) were filed. One of the writ petitions had been filed by Excel Wear, a registered partnership firm. Excel Wear had a factory at Bombay where it manufactured garments for exports, and wherein about 400 workmen were employed. It was the petitioner’s case that the relation between the Excel Wear management and its employees started deteriorating from the year 1974 and had become worse from 1976. From Aug. 1976 the workmen became very militant, aggressive, violent, indulged in unjustifiable or illegal strikes and the labour trouble in the factory became of an unprecedented nature. Excel Wear, finding it difficult, to carry on the business of the factory, served a notice on the State Government of Maharashtra, for previous approval of the intended closure of the undertaking in accordance with Section 25-O (1) of the Act. However, the State Government refused to grant the approval.
Another writ petition was filed by Acme Manufacturing Co. Ltd., who was obliged to decide to close down the undertaking due to huge losses incurred by them on account of low productivity, serious labour unrest and indiscipline resulting in various incidents of assaults or the like. The Company, therefore, applied to the State Government of Maharashtra on May 2, 1977 under S. 25-O (1) of the Act for approval of the intended closure, but the State Government refused.
The other two writ petitions were also of a similar nature.
The main issues before the Supreme Court were –1) whether A.19(1)(g) also included a fundamental right to close down a business? 2) And if there is such a right, then whether the restrictions imposed by Ss.25-O and 25-R of the Act, which in essence required a prior approval by the government for closure of business, are reasonable or not?
1. With regards to the inherent right to carry on business
The Apex Court in this case relied upon the same case of M/s Hatisingh Mfg. Co. Ltd. v. Union of India and held that the right to carry on any business includes a right to start, carry on or close down any undertaking and the payment of compensation to the employees are not condition precedents to the closure of business. The Court in the instant case stated in a negative form that it is wrong to say that an employer has no right to close down a business once he starts it. If he has such a right, as obviously he has, it cannot but be a fundamental right embedded in the right to carry on any business guaranteed under Art. 19(1)(g) of the Constitution.
The Court observed that the owner cannot be asked to part with them or destroy the properties and business assets invested by not permitting him to close down the undertaking. In a given case for his mismanagement of the undertaking resulting in bad relation with the labour or incurring recurring losses the undertaking may be taken over by the State. It will be consistent with the object of making India a Socialist State. But not to permit the employer to close down is essentially an interference with his fundamental right to carry on the business.
The Apex Court appreciated the fact that the employees are adversely affected and has to face a lot of hardships whenever there is any closure of business. The Court also relied upon the observations made by the Court in M/s Hatisingh Mfg. Co. Ltd. v. Union of India  that "Closure of an industrial undertaking involves termination of employment of many employees, and throws them into the ranks of the unemployed, and it is in the interest of the general public that misery resulting from unemployment should be redressed…retrenchment compensation was intended to give the workmen some relief and to soften the rigour of hardship which retrenchment brings in its wake when the retrenched workman is suddenly and without his fault thrown on the streets, to face the grim problem of unemployment…….Loss of service due to closure stands on the same footing as loss of service due to retrenchment, for in both cases, the employee is thrown out of employment suddenly and for no fault of his and the hardships which he has to face are, whether unemployment is the result of retrenchment or closure of business, the same."
In case of retrenchment only a specified number of workmen lose their employment while in closure all the workmen become unemployed. However, the Court also held that just because the employees become unemployed, it cannot be used as a justification for not allowing the employer to close down his business when it becomes unprofitable and unpractical to run the same.
2) With regards to the constitutionality of the impugned provisions
The Supreme Court held Ss. 25-O and 25-R to be constitutionally invalid, in violation of A.19(1)(g) of the Constitution. The Court held that the impugned provisions constitute unreasonable restrictions on the right of closure of business, which is a part of the freedom to carry on business as guaranteed by A.19(1)(g) of the Constitution.
The Court also referred to the observations made in the case of Narendra Kumar v. Union of India that "In applying the test of reasonableness, the Court has to consider the question in the background of the facts and circumstances under which the order was made, taking into account the nature of the evil that was sought to be remedied by such law, the ratio of the harm caused to individual citizens by the proposed remedy, to the beneficial effect reasonably expected to result to the general public. It will also be necessary to consider in that connection whether the restraint caused by the law is none than was necessary in the interests of the general public."
The Court observed that it is highly unreasonable to achieve the object of maintaining production of the commodity by compelling the employer not to close down in public interest for maintaining production. The Court also observed that in case of bona fide closures, though the reasons given by the employers are correct, adequate and sufficient, yet the permission to close might be refused on ground of public interest. Hence the law is unconstitutional as it permits the authority to pass a capricious, whimsical and one-sided order.
Excel Wear case is a landmark case on the Company’s inherent right of closing down its business. If the Court in this case had not recognised the employer’s right to close down his business and had upheld the impugned provisions, then the Companies would have been at mercy of the whims and fancies of the State. It would have discouraged businessmen even to start their business, as a fear that they would be forced to carry on their business even if it was incurring heavy losses would have constantly lurked in their minds. The business environment would have been suffocated under the pretext of socialism.
The ‘license raj’ would have prevailed as the closure of the business could be refused without assigning any reasons to it. Upholding of the impugned provisions would have adversely affected the right of the members’ voluntary winding up. The voluntary winding up could have been denied on the whims and fancies of the government.
The Court in this case had recognised that the workers on the closing down of business would be put in considerable difficulty. But the Court at the same time held that refusing closure of business just because workers would become unemployed is an unreasonable restriction on the right to close down business (inspite of insertion of the word “Socialism” in the Preamble by the 44th Constitutional Amendment Act, 1976) as in every closure of business workers are bound to lose their jobs and that non-closure of business was not an appropriate remedy for unemployment. The Court held that the workers should be paid compensation on closing down of the business. This right of payment of the workers has been recognised in S.529-A of the Companies Act, which provides that the workers shall rank pari passu with the secured creditors and above the government, for recovering their legitimate claims.
Voluntary winding up means winding up by the members or creditors without any intervention of the court.
There are two types of voluntary winding up procedures:
Member’s voluntary winding up: According to S.488 of the Companies Act, member’s voluntary winding up is possible when the company is solvent and is able to pay its liabilities and a declaration of solvency has to be made by the directors.
On passing of the winding up resolution the company shall cease to do business, unless it is a beneficial winding up. S.487 of the Companies Act, which provides the concept of beneficial, winding up, embodies the principle that the object of the winding up is to realize the assets, pay off the liabilities and distribute the surplus as expeditiously as possible. And hence it contemplates carrying on the business except to the extent necessary for beneficial winding up of the company.
After analysis of the Excel Wear case and the related company law provisions, it can be said that the right of the members’ of the company of voluntary winding up and the right of the workers to compensation has been aptly balanced.
The term “Socialism” being stated in the Preamble of the Indian Constitution, it is a duty of the Welfare Indian State to provide a solution to the problem of unemployment faced by the workers. At the same time the right of the businessmen to close down their business (and in particular the members’ right of voluntary winding up) has to be protected. The Apex Court in Excel Wear case by holding the impugned provisions as unconstitutional has rightly prevented the businessmen from being forced to implore to the government for permission to close down their business which could have been easily denied by the government arbitrarily and without any reason.
 British Gas Water Syndicate Ltd. v. Notts Derby Water Gas Co. Ltd. (1889) WN 204 ; Perveril Gold Mines, Re, (1808) 1 Ch 122 as referred in Jehangir M.J. Sethna, “Indian Company Law”, eleventh edition, Modern Law Publications, Allahabad, 2005, p.4132
 AIR 1979 SC 25
 The facts of these four different cases were of a similar nature.
 writ petition No. 644 of 1977
 (1960) 3 SCR 528 : (AIR 1960 SC 923) 535 :- "By Art. 19 (1) (g) of the Constitution freedom to carry on any trade or business is guaranteed to every citizen, but this freedom is not absolute." "In the interest of the general public", says the learned Judge, "the law may impose restrictions on the freedom of the citizens to start, carry on or close their undertakings." This clearly indicates, and the whole ratio of the case is based upon this footing, that the right to carry on any business includes a right to start, carry on or close down any undertaking. It has further been pointed out on the same page that "by S. 25FFF (1), 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." Referred in Excel Wear v. Union of India AIR 1979 SC 25 at p. 31
 M/s Hatisingh Mfg. Co. Ltd. v. Union of India AIR 1960 SC 923 (928)
 AIR 1960 SC 430 (437)
 Further, as per S.536 of the Companies Act, any transfers of shares or disposition of the property after commencement of winding up are void unless sanctioned by the Liquidator.
 The expression beneficial winding up of the company is not confined to financial benefits only. The carrying on business for the purpose of smooth taking over by another company by way of reconstruction, amalgamation or merger will fall within the meaning of the term Willis v. Association of Universities of the British Common Wealth (1965) 35 Comp Cas 442 (CA)