Anakapalla Co-Operative Agricultural & Industrial Society v/s It's Workmen - Landmark Judgment
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Anakapalla Co-Operative Agricultural & Industrial Society v/s It's Workmen & Others

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Author of the article: Neha Bahl, 3rd Year Student, NALSAR University of Law, Hyderabad Dated:
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Anakapalla Co-Operative Agricultural and Industrial Society v/s It's Workmen & Others
The chief object of the industrial relations legislations in general is industrial peace and economic justice. If a workman is retrenched or his services are terminated on account of transfer of undertaking, the question of survival of workman's family immediately arises. The concept of compensatory justice requires that such a workman should be given compensation in lieu of termination of his services. This as well as re-employment is the main point involved in this case.

In the present case, the Vizagapatnam Sugar and Refinery Ltd. was engaged in the business of manufacture of sugar and was running at loss. It sold its machineries and business to appellants. It was agreed as part of the sale transaction that the vendor company should pay to its employees the retrenchment compensation as calculated under Section 25-F of the Industrial Disputes Act, 1947, and terminate their services leaving the appellant full freedom to choose its own employees.

The retrenchment compensation was paid by the vendor company. The society continued the same business in the same place without any appreciable break and took in its employment a number of employees of the vendor company. But 49 permanent employees and 103 seasonal employees of the vendor company were not given re-employment by the vendee appellant. The dispute arose with regard to the claim for re-employment of the employees of the vendor company who were not taken in service by the appellants. The workmen represented to the State Govt. that their demand should be adjudicated upon by an industrial tribunal. This dispute was referred by Governor of AP to the industrial tribunal, Hyderabad for adjudication.

The main points of controversy involved in this case were as follows: -
1) What is the scope and effect of Section 25-FF of the Act
2) Whether the vendee of a business is a successor-in-interest for the purpose of meeting the claim of the employees who were in employment under the vendor for re-employment on the same terms and conditions and with continuity of service
3) Whether the workers union was competent to raise the present industrial dispute

The tribunal held that the appellant was a successor-in-interest of the company and surprisingly gave directions to the society to give re-employment to the concerned employees. The tribunal also held that the sponsoring union was, in law, competent to raise the present industrial dispute and so it rejected the appellants contention about the invalidity of the reference.

Aggrieved from the order of the tribunal, the appellant filed appeal before the Supreme Court. The first question which fell for consideration of the SC was whether the appellant is a successor-in-interest of the vendor company. It was contended on behalf of the appellant that they could not be held as a successor-in-interest of the vendor company and in any event the concerned employees were not entitled to claim re-employment but were only entitled to statutory retrenchment compensation under Section 25-FF r/w Section 25-F of the Act from the vendor company, which was paid to them.
The argument of the Solicitor General was that though the work of the vendor company was, in a sense, a going concern when it was purchased by the appellant and that the appellant had not purchased the entire undertaking including the goodwill and so it would be inappropriate to describe the appellant as the successor-in-interest of the vendor company. In support of his arguments, the learned Solicitor General relied upon the ratio of Ramji Lal Nathu Lal and others v. Hima Bhai Mills Company Ltd. and others and Antony D'souza and others v. Sri Moti Chand Silk Mills. The argument of the Solicitor General does not appear to be sound because the business was continued by the vendee company without any break, the place of business and the business itself was the same. Moreover, the object of sale transaction was to enable the local cane growers to carry on the business of the company.

It was observed by SC that the vendor company sold the concern to the appellant because it was faced with the problem of recurring losses, and so the appellant, in purchasing the concern, was not prepared to have both the advances and the outstanding included in the sale transaction. The appellant society has been formed by the local cane growers with the object of manufacturing sugar and so the purchaser was not particularly interested in including the goodwill of the company in the sale transaction. The exclusion of 4,000 bags of processed sugar shows that the purchaser wanted to accommodate the vendor company in that matter. In my opinion, the SC rightly held that the tribunal was right in law in coming to the conclusion that the appellant is a successor-in-interest of the vendor company.


It was also contended that the concerned employees are not entitled for re-employment against the appellant, thus the directions given by the tribunal with reference to re-employment of the concerned workmen should be set aside. In my humble submission, this argument of Solicitor General is justified because the retrenched workmen had already received compensation from the vendor company in accordance with agreement of sale.

Be that as it may, what was the nature of the vendees liability to the workmen of vendor company It is important to emphasize that before Section 25-FF was introduced in the Act in 1956, this question was considered by industrial adjudication on general considerations of fair play and social justice and sometimes the claim for re-employment was allowed, or sometimes the claim for compensation was considered. But no decision could be found which could support the argument under which the employees were held entitled to compensation against the vendor employer as well as re-employment at the hands of vendee on the ground that it was a successor-in-interest of the vendor.

It was in this background that the legislature enacted Section 25-FF on 4th Sept. 1956. A plain reading of Section 25-FF shows that the section proceeds on the assumption that if the ownership of an undertaking is transferred, the cases of the employees affected by the transfer would be treated as cases of retrenchment u/s 25-F. That is the reason why old Section 25-FF begins with a non-obstante clause and lays down that the change of ownership by itself will not entitle the employees to compensation unless the three conditions of the proviso are satisfied. Prima facie, if the three conditions specified in the proviso were not satisfied, retrenchment compensation would be payable to the employee in accordance with Section 25-F. This was the scheme which the legislature had in mind when it enacted Section 25-FF in the light of the definition of the word retrenchment prescribed by Section 2 (oo) of the Act.

The validity of this assumption that employees are entitled to compensation on account of transfer of undertaking was, however, successfully challenged in SC in Hari Prasad Shiv Shankar Shukla v. A.V. Divikar, 1957-I LLJ 243 (SC). In this case, SC decided the true scope and effect of the concept of retrenchment as defined in Section 2 (oo). SC held that ?retrenchment? means the 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 does not include termination of services of all workmen on a bona fide closure of industry or on change of ownership or management. It also held that the definition of the word retrenchment may have included the termination of services caused by the closure of the concerned or by its transfer, but both the cases will not fall within the definition of word retrenchment. This decision necessarily meant that the word retrenchment in Section 25-FF had to bear a corresponding interpretation as given u/s 2 (oo). Similar view was taken in Barsi Light Railway Company Ltd. v. K.N. Joglekar.

Analysis of the ratios of above cases shows that the object of the legislature in introducing Section 25-FF was to enable the employees of the vendor concerned to claim retrenchment compensation unless the three conditions of the proviso to the said section were satisfied. The decision in Hari Prasad's case was pronounced on 27th November, 1956 and it was held that the appellants are not liable to pay any compensation u/s 25-F of the Act to the erstwhile workmen. The ratio of this case could not be carried out any longer.

This decision led to the promulgation of an ordinance no.4 of 1957 w.e.f. 1-12-1956, within three days of pronouncement of judgment in Hari Prasad's case. By this ordinance the original Section 25-FF, as it was inserted on 4th Sept., 1956, was substantially altered. In due course, this ordinance was replaced by Act No.18 of 1957 on 6th June 1957. By this Amendment Act, Section 25-FF as it was enacted by the ordinance has been introduced in the parent Act. It is to be noticed that the Act came into force retrospectively w.e.f. 28th November, 1956, that is to say, from the next day of the pronouncement of judgment by SC in Hari Prasad's case.

In my opinion, because of insertion of new Section 25-FF, as substituted by Act No.18 of 1957, the question in present appeal has now to be determined not in the light of general principles of industrial adjudication, but by reference to the specific provisions of Section 25-FF itself. It was emphasized by the court that the first part of Section 25-FF postulates that on a transfer of the ownership or management of an undertaking, the employment of workmen engaged by the said undertaking comes to an end, and it provides for the payment of compensation to the said employees because of the said termination of their services, provided they satisfy the test of length of service of one year prescribed by the section. This part of the section further provides the manner and the extent to which the said compensation has to be paid. Workmen shall be entitled to notice and compensation in accordance with provisions of Section 25-F as if the workmen had been retrenched.

Formula: Retrenchment Compensation = 15 days average pay X number of years of continuous service.

A careful reading of Section 25-FF clearly brings out the fact that the termination of the services of the employees does not in law amount to retrenchment and that is consistent with the ratio of Hari Prasad's case.

The legislature, however, wanted to provide that though such termination may not be retrenchment technically so called, nevertheless the employees in question whose services are terminated by the transfer of the undertaking should be entitled to compensation, and hence, Section 25-FF provides that on such termination compensation would be paid to them as if termination was retrenchment. The words as if brings out the legal distinction between retrenchment defined u/s 2 (oo) and termination of services consequent upon transfer of undertaking. Section 25-FF makes a reference to Section 25-F for that limited purpose, and therefore, in all cases to which Section 25-FF applies, the only claim which the employees of the transferred concerned can legitimately make is a claim for compensation against their employers. No claim can be made against the transferee of the said concern. The counsel for respondents urged that the present case ought to be governed by the provisions of Section 25-H of the Act since the case of termination of service resulting from transfer of ownership or management of an undertaking to which Section 25-FF applies is a case of retrenchment properly so called. But I have serious objection to this because Section 25-H can be made applicable in cases of real retrenchment and the section does not apply to those cases where Section 25-FF is applicable. This contention of the counsel for respondents was rightly rejected by the SC.

In Hati Singh Manufacturing Co. & another v. Union of India & others SC considered the effect of words as if occurring in Section 25-FF, and it has been held that by the use of words as if the workmen had been retrenched under the said section, the legislature has not sought to place closure of an undertaking on the same footing as retrenchment u/s 25-F. Therefore, the plea that Section 25-H applies to the present case was rightly rejected.
It was next contended that the workmen are entitled to re-employment under general principles of social justice and fair play. My problem with this argument is that when Section 25-FF has been expressly enacted, hence, it is difficult to see how any question of fair play or social justice would justify the claim by the respondents that they ought to be re-employed by the appellant.

According to text of S.N. Misra and scheme of the Act in cases falling u/s 25-F, workmen may get retrenchment compensation and they may yet be able to claim re-employment u/s 25-H and in that sense, some workmen may get both retrenchment compensation and re-employment. That is the effect of reading Sections 25-F and 25-H together. It must be borne in mind that in case of retrenchment, the undertaking continues and only some workmen are discharged as surplus and it is the problem of re-employment of this small number of discharged workmen that is tackled by Section 25-H. Besides, u/s 25-H a discharged workman may not be entitled to claim re-employment immediately after the retrenchment or soon thereafter. It is only if the employer who discharged him as surplus requires additional workmen in future, then the opportunity of re-employment may occur on the basis of principle of first go first come.

However, as per the facts of the present case, the position is entirely different. As soon as the transfer is affected u/s 25-FF, all employees are entitled to claim compensation, unless, of course, the case of transfer falls under the proviso. In my opinion, if the argument of counsel for respondents is accepted, the workmen could have got double benefit of taking compensation from the vendor and of taking re-employment from the vendee. Thus, it was rightly held by the SC that this double benefit cannot be said to be based upon any considerations of fair play or justice to both the parties. Thus, it was held that it would not be fair that the vendor should pay compensation to his employees on the ground that the transfer brings about the termination of their services, and the vendee should be asked to take them back on the ground that the principles of social justice require him to do so. Similar is the ratio of Indian Hume Pipe Co. Ltd. v. Their Workmen and Another which was followed in the present case.

Legal Position before Anakapalla's case

Under the Act as originally enacted, there was no provision for payment of compensation to the retrenched workmen and hence, the authorities had to consider various factors in determining the compensation in the absence of uniform rules. In 1953, a huge stock had accumulated in textile industries. Textile mills were in a mood to close one or more shifts. The closure resulted in retrenchment or laying-off a large number of textile employees causing great unrest in the whole of the textile industry. In order to overcome the situation, the President of India promulgated the Industrial Disputes (Amendment) Ordinance, 1953 to take effect from 24th October, 1953. This ordinance made provision for payment of retrenchment compensation. This ordinance was repealed and replaced by the Industrial Disputes (Amendment) Act, 1953 on 23rd December, 1953. Section 25-A to 25-J were added by this amending Act of 1953.

Legal position after Anakapalla's case

In Workmen of Subong Tea Estate v. Subong Tea Estate, the SC in SLP held that retrenchment was not in consequence of transfer, but was effected after the transfer was made. The retrenchment was made by the transferee who in the meantime became employer of the retrenched workmen by virtue of his assuming control and management of the tea gardens. Therefore, Section 25-FF was not attracted.

Taking partial ratio of Anakapalla's case further, in Board of Directors of South Arcot Electricity Distribution Co. Ltd. v. Elumalai, the South Arcot Electricity undertaking was taken over by the State. The conditions of service were less favourable to workmen under the State Govt. as compared to the old employer before transfer of undertaking. It was held by the SC that the proviso to Section 25-FF cannot be invoked by the company for the purpose of defeating the claim of the workmen u/s 25-FF from the vendor.

In Ambala Cantonment Electricity Supply Corporation v. Workmen, it was held that the compulsory purchase of the undertaking of the petitioner company by the board without taking over the employees amounts to transfer of ownership or management of undertaking from one employer to another. The transfer contemplated by Section 25-FF is of undertaking, and not of its employees. Therefore, the workmen were entitled to retrenchment compensation as provided u/s 25-FF of the Act. In Workmen of Karnataka Agro Proteins Ltd. v. Karnataka Agro Proteins Ltd. & others, it was held that in case of transfer of ownership or management of an undertaking, the employees can only make a claim for compensation against their employers. No claim can be made against transferee concern. The court cannot give directions to transferee company to absorb and continue in service the workmen. Recently, in Maruti Udyog Ltd. v. Ram Lal & others, it was observed by the SC that the workmen were retrenched in August 1977 and they did not challenge their retrenchment. The company thereafter went into liquidation and was transferred to the petitioner three years later. Hence, the petitioner cannot be said to be the successor-in-interest of the company. It was also held that u/s 25-H, a workman can claim re-employment after retrenchment only from that employer who had retrenched him.

Maruti Udyog Ltd. followed the ratio of Akhil Bharatiya Koyla Kamgar Union v. Employers in relation to Management of Industry Collery of Bharat Coking Coal Ltd. & Anothers, wherein the workmen were retrenched u/s 25-F by the management on 9-6-1971 due to financial problems and later on the management was taken over by the Central Govt., it was held that there has been no retrenchment u/s 25-FF. The ratio of this case is clearly distinguishable from Anakapalla's case.

In my opinion, the ratio of Hari Prasad's case and Anakapalla's case was followed and confirmed in Maruti Udyog Ltd. v. Ram Lal & others. Further I am of the opinion that once Section 25-F has no application in cases of transfer of an undertaking or closure thereof as contemplated in Section 25-FF and 25-FFF, the logical corollary would be that in such an event Section 25-H will have no application. Hence, the terminated workmen on account of transfer or closure have no right to claim re-employment from the vendee. My opinion gets confirmed by the ratio of Punjab Land Development & Reclamation Corp. Ltd. v. Presiding Officer Labour Court, Chandigarh, and H.P. Mineral & Industrial Development Corp. Employees Union v. State of HP, wherein it was held that in cases of transfer/closure of undertaking it would be inconsistent to read into Section 25-F a right given to workmen deemed to be retrenched a right to claim re-employment u/s 25-H.

The author can be reached at: nidhi@legalserviceindia.com / Print This Article

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