When an Employer Closes But Leaves Some Workmen Untrenched, Is the Closure Genuine in Law?

A recurring dispute in Indian industrial law arises when an employer announces the closure of an establishment but the services of only some, not all, workmen are terminated. Employers defend such terminations as the natural consequence of a closure, while workmen argue that retention of a few employees proves the shutdown is a sham. The central question is this: if, on closure of an establishment, the services of not all workmen are terminated but a few are left as such, is the closure genuine and sustainable?

The Short Answer

The genuineness and sustainability of a closure do not depend on whether all or only some workmen's services are terminated. A closure is genuine if the employer has permanently and irrevocably closed the business or undertaking, regardless of whether a few workmen are left untrenched. The test is whether the closure is bona fide and final in fact, not whether every single worker has been discharged. Motive is largely immaterial; what matters is whether the shutdown was real and effective. 1968 0 Supreme(SC) 155

Closure and Retrenchment Are Distinct Concepts

Understanding why the number of terminated workmen is not decisive requires grasping the doctrinal line between closure and retrenchment:

• Retrenchment applies to the discharge of surplus labour in a continuing industry. Section 2(oo) of the Industrial Disputes Act, 1947 defines it as discharge of surplus labour or staff for any reason whatsoever, other than as punishment by way of disciplinary action.
• Closure applies to the permanent shutting down of the business or undertaking itself. When the industry itself ends, the employer-employee relationship ceases by operation of law, resulting in what is sometimes described as deemed retrenchment under Section 25FFF rather than retrenchment under Section 25F.

  KRISHI FOUNDRY EMPLOYEES UNION VS KRISHI ENGINES LIMITED

In the landmark ruling in Hariprasad Shivshankar Shukla v. A.D. Divelkar (AIR 1957 SC 121), the Supreme Court held that retrenchment has no application where the services of all workmen have been terminated by the employer on a real and bona fide closure of business. 1956 0 Supreme(SC) 103 This principle was reaffirmed in later decisions, including Mohd. Sarwar v. State of U.P., where the court clarified that termination on account of closure of an establishment does not amount to retrenchment at all, and that Section 25-N cannot apply where termination of services was brought about as a result of closure. 2013 0 Supreme(All) 1477 and 2023 0 Supreme(All) 2778

The Test of a Genuine Closure

In Andhra Prabha Ltd. v. Secy., Madras Union of Journalists (AIR 1967 SC 1869), the Supreme Court articulated the operative test:

The motive behind the closure is immaterial and what has to be seen is whether it was an effective one. 1968 0 Supreme(SC) 155

The closure must be genuine and bona fide in the sense that it is a closure in fact and not a mere pretence. Key indicators courts typically examine include:

1. Permanence and irrevocability – has the business actually and finally shut down, with no intention or ability to resume?
2. Cessation of operations – has production or the undertaking's activity genuinely stopped in substance, not just on paper?
3. Effectiveness of the closure – a closure with an economic or even unpleasant motive is still valid if it is real and effective. 1968 0 Supreme(SC) 155

Because the focus is on the finality and irreversibility of the business shutdown rather than on the headcount of discharged workers, a closure may be genuine even if a handful of workmen are retained — for instance, to guard premises, wind up affairs, or handle residual tasks. Nothing in the Hariprasad line of authority conditions genuineness on the discharge of every workman.

The Flip Side: Sham and Pretence Closures

The employer's position collapses if the closure is a disguise. Where the business continues in substance, the action may be recharacterised as a lockout or an unfair labour practice. The Supreme Court has drawn the line clearly:

If the action taken by the appellant is not a lockout but is a closure, bona fide and genuine, the dispute which the respondents may raise in respect of such a closure is not an industrial dispute at all. On the other hand, if, in fact and in substance it is a lockout, but the said action has adopted the disguise of a closure... it would be an industrial dispute which industrial adjudication is competent to deal with. 1968 0 Supreme(SC) 38

A related safeguard appears in cases where workmen are terminated without statutory protections while disputes are pending or where perennial work continues — courts have treated such conduct as a deliberate attempt to circumvent lawful claims, ordering reinstatement and back wages. 2025 3 Supreme 17 Similarly, retrenchment of even a single workman must be bona fide and follow statutory criteria; a Labour Court finding that reasons for terminating a particular employee were not genuine can result in reinstatement. 1966 Supreme(Online)(Gau) 9

Procedural Compliance: Section 25-O and Chapter V-B

Genuineness of intent is only half the analysis; legality also requires procedure:

• Establishments covered by Chapter V-B of the Industrial Disputes Act (those employing 100 or more workmen) must obtain prior permission under Section 25-O before closing down.
• Failure to obtain such permission may render the closure illegal, entitling affected workmen to compensation as if the termination were invalid. In one matter, the Labour Court ruled against management precisely because no valid closure permission was obtained. 2025 0 Supreme(Del) 683
• Conversely, once a valid closure occurs, reinstatement with back wages is generally not granted, since reinstatement presupposes a running establishment and an existing post. 2026 0 Supreme(Pat) 38
• Where a project or unit is genuinely closed, Section 25F protections (notice and compensation on retrenchment) typically do not apply, and settlements arrived at in conciliation covering closure-related terminations have been upheld as binding. 2006 0 Supreme(Cal) 795

How This Applies to Partial Retention of Workmen

Putting it together for the scenario in question:

• If the establishment is genuinely and irrevocably shut down, retaining a few workmen (for winding up, security, or allied residual purposes) does not by itself make the closure non-genuine or unsustainable.
• If, however, the business continues in substance and only selected workers are removed under the label of closure, the action risks being treated as retrenchment (requiring Section 25F compliance) or as a sham closure amounting to a lockout or unfair labour practice. 1968 0 Supreme(SC) 38 and 1956 0 Supreme(SC) 103
• Tribunals will examine substance over form — actual cessation of operations, disposal or idling of the undertaking, and whether the retained employees indicate the industry is still running.

Key Takeaways

• The number of workmen terminated is not the legal test; permanence, irrevocability, and bona fides of the shutdown are.
• Termination due to genuine closure is not retrenchment under Section 2(oo) of the Industrial Disputes Act, 1947. 2013 0 Supreme(All) 1477
• A sham or pretence closure, where the business continues, invites industrial adjudication and can attract reinstatement and compensation liabilities.
• For larger establishments, prior permission under Section 25-O (Chapter V-B) is a mandatory procedural prerequisite, and non-compliance can invalidate the closure.

This discussion reflects general principles drawn from judicial precedent and may vary with the facts of a particular case or state-specific legislation; parties should assess their specific circumstances before acting.