Right to Trade versus Protection of Workers: Legal Safeguards on Closure of Industrial Establishments

Introduction

The perplexing intersection between the right to (or not to) do lawful trade, and the statutory protection of workers, was brought into focus by the Supreme Court of India through its recent decision in Harinagar Sugar Mills Ltd. (Biscuit Division) v. State of Maharashtra¹. This judgment examines how the constitutional guarantee of the right to carry on or cease business under Article 19(1)(g)² interacts with the regulatory framework of the Industrial Disputes Act, 1947³ (ID Act, 1947). Central to this case is the recognition that while the Constitution⁴ protects economic autonomy, the statutory scheme envisaged under our labour regulations impose procedural and substantive checks on the closure of industrial undertakings so as to ensure a balance between business freedom and social justice.

Factual background

For over three decades, Harinagar Sugar Mills Ltd. (HSML) operated its biscuit division solely as a contract manufacturer for Britannia Industries Limited (BIL), under a series of job work agreements (JWA). When BIL exercised its contractual right to terminate the JWA in 2019, after giving due notice, HSML found itself with no alternative business and therefore operating/running the factory was no longer commercially viable. Faced with this crisis, HSML invoked Section 25-O⁵ of the ID Act, 1947; a provision that governs the closure of industrial undertakings employing more than one hundred workers. Section 25-O requires employers to seek prior permission from the appropriate Government before closing an undertaking, and sets out a detailed process, designed to balance business exigencies with worker protections. Section 25-O(3), which is relevant for the present case, reads as follows:

25-O. Procedure for closing down an undertaking.—(3) Where an application has been made under sub-section (1) and the appropriate Government does not communicate the order granting or refusing to grant permission to the employer within a period of sixty days from the date on which such application is made, the permission applied for shall be deemed to have been granted on the expiration of the said period of sixty days.

The law, therefore, mandates that the “appropriate Government” must communicate its decision on the closure request made by an entity, within 60 days, failing which, permission for closure shall be “deemed to be granted”. In the present case, HSML’s application for closure, which was affecting 178 permanent workers, was met with repeated queries and demands for further justifications from the Maharashtra Government. The authorities questioned whether HSML had made adequate efforts to find new business, diversify or absorb workers elsewhere. Despite HSML’s submissions detailing how it had reached out to other major biscuit manufacturers and explaining the lack of alternatives, the Government did not issue a final order within the statutory 60-day period.

This factual backdrop gave rise to the following essential legal questions:

(i) Does the right to close a business, protected under Article 19(1)(g) of the Constitution, override or coexist with the procedural safeguards for workers under Section 25-O?

(ii) What is the effect of Government inaction or delay under Section 25-O(3)? Does statutory silence amount to “deemed permission”?

(iii) How should the law respond to the unique vulnerabilities of contract manufacturers, whose business models may leave them with no viable options once a principal contract ends?

Judicial history

The interplay between Article 19(1)(g) of the Constitution, guaranteeing the fundamental right to practice any profession, trade, or business and the ID Act, 1947’s closure provisions, have long been treading a judicial tightrope. In India, the right to close a business has evolved through a complex interplay of judicial interpretation, legislative amendments, and global economic realities. In most constitutional democracies, the right to exit a market is recognised as a core aspect of economic freedom, acknowledged in conventions like the OECD Guidelines for Multinational Enterprises, 2011 Edition⁶, which stress that governments should not unduly impede a company’s decision to restructure or close operations, provided social responsibilities are met. In India, however, this freedom has always been tempered by a strong tradition of labour protection.

The Bombay High Court in 1978 in Excel Wear v. Union of India⁷ struck down Sections 25-O and 25-R⁸ as unconstitutional for violating Article 19(1)(g), observing that the right to close a business is an “integral part” of the right to carry on trade. The Supreme Court later upheld this reasoning, emphasising that while restrictions are permissible, they must not render the right illusory.

In Orissa Textile & Steel Ltd. v. State of Orissa⁹, the Supreme Court clarified that statutory closure procedures must not become a “veiled prohibition”, mandating authorities to assess applications through the lens of genuine business viability rather than abstract notions of public interest. This case upheld the amended Section 25-O and established that economic unviability constitutes valid grounds for closure. Thereafter a nuanced shift emerged as the Supreme Court underscored that procedural compliance under Section 25-O cannot override substantive worker protections. However, it stopped short of defining what constitutes “adequate steps” to avoid closure, a gap later exploited in bureaucratic delays.

Prior to the present case, the courts had not squarely decided two critical issues:

(i) Whether statutory timelines for government decisions under Section 25-O(3) create enforceable rights (deemed permission) or mere directions/guidelines.

(ii) How courts and statutory authorities should assess closure applications when businesses operate solely as captive units for single clients, with no diversification avenues.

Analysis and decision

The Supreme Court in the present case began by reaffirming that the right to close a business is a protected facet of Article 19(1)(g) of the Constitution, as recognised in Excel Wear case¹⁰. However, this right is not absolute and is subject to reasonable restrictions¹¹ in the public interest. Section 25-O of the ID Act, 1947, is one such statutory restriction, requiring prior Government permission for closure and mandating a fair process for both employers and employees.

Further, a central question was the effect of Government inaction within the statutory 60-day period under Section 25-O(3). The Court held unequivocally that if the Government fails to communicate its order within 60 days of the closure application, permission for closure is “deemed to be granted”. This, the Court reasoned, is a legislative safeguard against bureaucratic delay and ensures that the statutory process cannot be rendered nugatory by administrative inaction. The Court stated as follows:

10. If there exists the freedom to set up and run a trade/business as one sees fit, necessarily, there has to be a set of rights vesting with the proprietor/owner to take decisions as may be in his best interest. At the same time, it is true that the law does not permit such owner or proprietor to take any and all decisions without having considered and accounted for the impact that it shall have on the employees or workers that are part of this establishment. This is evidenced by the provision extracted above providing for a detailed procedure to be followed when a person wishes to “shut shop”, but concomitant providing that if the Government concerned does not take action with reasonable expediency, the business owner should not be saddled with the costs and responsibilities of running the business indefinitely, till such time the authority arrives at a proper and just decision. The sum and substance are that Article 19(1)(g) includes the right to shut down a business but is, of course, subject to reasonable restrictions.

The Court further examined the correspondence between HSML and the Government, noting that HSML had made credible efforts to avoid closure, including reaching out to other biscuit manufacturers (Mondelez, ITC, Parle) and attempting to persuade Britannia to continue the contract. The authorities’ repeated demands for further justification, even after these efforts were documented, were found to be excessive and not in keeping with the statutory mandate. The Supreme Court emphasised that the statutory scheme under Section 25-O is designed to prevent arbitrary or indefinite delays by the authorities, which could otherwise frustrate the substantive rights of employers. The Court scrutinised the Government’s conduct, finding that the Deputy Secretary’s request for further details from HSML could not be construed as an order (whether interim or final) as per Section 25-O(2). Consequently, the failure of the authority to act within the prescribed timeline of 60 days is liable to trigger the statutory deeming provision, thus reinforcing the principle that administrative inaction cannot be used to subvert legislative intent.

The Court also recognised the unique vulnerability of businesses like HSML, which operate solely as units for a single principal. The judgment¹² acknowledged that, in such cases, the end of the principal contract effectively leaves the manufacturer with no viable business alternative. The law, the Court held, cannot require the impossible, and if all reasonable avenues have been explored and exhausted, closure may be inevitable. Importantly, the Court clarified that even when closure is deemed permitted under Section 25-O(3), the employer remains bound to provide notice and compensation to workers as per Section 25-N¹³. The statutory scheme is designed to ensure that workers are not left without recourse, even as the employer’s right to closure is recognised.

The Supreme Court while setting aside the Bombay High Court’s judgment¹⁴ held that, by operation of law, HSML’s application for closure stood allowed as of the expiry of the 60-day period. However, the Court directed that all statutory dues and compensation to workers be paid strictly in accordance with the Act and as undertaken by HSML.

Conclusion

This decision¹⁵ is not just about statutory interpretation, it is a reflection on the realities of modern industrial operations. The Court, while upholding the procedural rights of HSML, implicitly acknowledges the limitations of regulatory frameworks in addressing the economic fallout for workers when business models collapse overnight.

Harinagar Sugar Mills case¹⁶ is a reminder that, in the world of contract manufacturing, the end of a contract can spell the end of an enterprise. The law provides a process, but not always a solution, for the human and economic consequences that follow. The judgment thus probes the limits and contours of a business’s right to closure, situating it within the broader constitutional realities and the ever-evolving landscape of industrial relations in India. In doing so, the Supreme Court not only interprets the black letter of the law but also acknowledges the social contract that underpins the world of work, where every closure is not just a corporate decision, but a human story with ripples far beyond the factory gates.