Can a Company Withhold Your Dues After You Resign?

The Central Inland Water Transport Corporation was incorporated on February 22, 1967. The Union of India held the majority of its shares, and the States of West Bengal and Assam held the rest. Its Articles described it as a private company under the Companies Act, yet the President of India could direct its affairs and appoint or remove its directors. It ran river services, built and repaired vessels and did general engineering work.

The Corporation did not start from scratch. On May 5, 1967, the Calcutta High Court approved a scheme of arrangement between the Corporation and the Rivers Steam Navigation Company Limited. The judgment records that the court ordered the closure of that company and directed that, once all its creditors were paid, it would stand dissolved without winding up. The Corporation took over its assets, certain liabilities and as many staff as could reasonably be absorbed. Staff who were not absorbed were to be paid what the law allowed, including compensation under the Industrial Disputes Act or otherwise legally admissible, with the money provided by the Government of India.

Brojo Nath Ganguly was already working in the old company when the scheme took effect. The Corporation took over his services, and he was appointed Deputy Chief Accounts Officer on September 8, 1967. Tarun Kanti Sengupta, also an employee of the old company, had his services taken over in the same way and was appointed Chief Engineer on the ship River Ganga on the same date. Their appointment letters made them subject to service rules, which the Corporation framed in 1970 and replaced in 1979. The 1979 rules applied to all employees in the Corporation's units in West Bengal, Bihar, Assam or any other State or Union Territory. The exceptions were employees covered by the Standing Orders under the Industrial Employment (Standing Orders) Act, 1946, and employees for whom the Board of Directors had issued separate orders. Rule 9(i) said a permanent employee's job could end on three months' written notice from either side, with three months' basic pay and dearness allowance payable instead.

Ganguly rose to Manager (Finance) in October 1980 and acted as General Manager (Finance) from November 1981 to March 1982. On February 16, 1983, a confidential letter gave him 24 hours to answer an allegation of negligence in the Provident Fund accounts. He sent a representation and a detailed reply. On February 26, 1983, the Chairman-cum-Managing Director ended his service "with immediate effect" under Rule 9(i). A cheque for three months' basic pay and dearness allowance came with the letter.

Sengupta had been General Manager (River Services) since January 1, 1980. He said he missed an interview for the top post because the call letter reached him late. He also said the new Chairman-cum-Managing Director bore a grudge for that rivalry. A charge-sheet followed on February 1, 1983, saying a disciplinary inquiry was proposed. On February 10, Sengupta denied the charges and asked for the documents and witness statements. No inquiry was held. On February 26, 1983, he received the same Rule 9(i) notice and the same cheque.

The Corporation's excuses were these. It said a government company is incorporated like any other company, by a certificate under the Companies Act, and so cannot be "the State". It said statutory corporations are usually set up to create a monopoly, a government company is not, and it had no monopoly of inland water transport and was only a trading company. It said that even if it were "the State", an employment contract is like any other contract, so a term could not be struck down under Article 14 as arbitrary, unreasonable, unconscionable, one-sided or unfair. It also said Rule 9(i) was mutual, was needed to run the administration, and would not be misused by the Chairman-cum-Managing Director.

The case began in the High Court, not a trial court. Both officers filed writ petitions in the Calcutta High Court under Article 226, and a Single Judge stayed the terminations on an interim basis. The Corporation then went in Letters Patent Appeal before a Division Bench against those interim orders. On January 28, 1985, the Division Bench ordered that the writ petitions be transferred to it and heard along with those appeals. On August 9, 1985, it held that the Corporation was "the State" under Article 12 and that Rule 9(i) was ultra vires Article 14. It struck down Rule 9(i) as void and quashed the termination orders of February 26, 1983. The Corporation then came to the Supreme Court by special leave.

Rule 9(i) gave no reasons, no guidelines and no hearing. It did not even say who in the Corporation could use it. The Court counted four ways the rules allowed service to end before age 58:

• Rule 9(i).
• Rule 9(ii), which covers services no longer required in the interest of the Company.
• Dismissal under sub-clause (iv) of clause (b) of Rule 36 read with Rule 38.
• Rule 37, which allows termination without notice for insubordination, intemperance or other misconduct.

Separately, Rule 43 let the disciplinary authority skip an inquiry in three listed circumstances when imposing a penalty. Rule 9(i) was the only rule that did not state in what circumstances its power could be used.

The Contract Act did not obviously help. Sections 16 and 19A deal with undue influence, which makes a contract voidable. No coercion, fraud or misrepresentation was alleged. Section 23 says an agreement is unlawful if the Court regards its object as opposed to public policy. Nowhere does the Act use the word "unconscionable". No Indian case of this type had been decided, and no case on all fours from another country had been pointed out to the Court. The Corporation said freedom of contract and the mutuality of the clause settled the matter. The Court compared that mutuality to a lion and a lamb both being free to roam the jungle and devour each other.

A second gap sat under Article 12. Earlier decisions had treated statutory corporations, and some societies, as "the State". The Corporation argued that a government company is different, and the Court admitted no earlier decision squarely settled the point. One case had rested on a concession and another on an assumption. The Court answered that law advances by applying earlier reasoning to new facts.

On a similar Air India regulation, the Court dealt with the Makalu Case, a Division Bench decision of the Bombay High Court. It said that case "was wrongly decided and requires to be overruled". An appeal against it was already pending in the Supreme Court, so the Court left the formal reversal to the Bench hearing that appeal.

First came Article 12. The Court looked through the corporate veil. The Corporation was wholly owned and financed by three Governments, controlled by the Central Government, run by directors the Centre could remove, and engaged in work of vital public importance. It was "the State". That made it subject to Article 14 and open to a writ petition under Article 226.

Then came the contract. The Court held that courts will not enforce, and will strike down when asked, an unfair and unreasonable contract or clause entered into between parties unequal in bargaining power. The officers had no real choice. Refusing the rules meant losing their jobs, and they had no powerful union behind them. The Corporation could replace an officer easily, while an officer could not find another job so quickly. The Court called Rule 9(i) "the Henry VIII Clause", a fitting label for absolute, unguided power.

The Division Bench had struck the rule down under Article 14. The Supreme Court added the Section 23 ground, so Rule 9(i) was held void as opposed to public policy and also ultra vires Article 14. The Court also held that Rule 9(i) ignored the audi alteram partem rule, which guarantees a hearing before action. It added that a State agency framing such a rule also acts against Articles 39(a) and 41 of the Directive Principles. Two loopholes were closed:

• The undue-influence gap. Most standard-form clauses do not meet Section 16(1), which needs one party able to dominate the other's will. If such clauses were only voidable, every employee would have to sue separately. The Court said such a clause is instead void under Section 23 as opposed to public policy.
• The inquiry-avoidance gap. Rule 9(i) let the Corporation pick one employee for a quiet termination and another for a Rule 38 inquiry, even on the same facts. The Court held this arbitrary and discriminatory, and so a violation of Article 14.

The High Court was right to quash the terminations but wrong to strike down all of Rule 9(i). The same rule gave employees a right to resign, and the Court said an employee does not sign a bond of slavery. It therefore replaced the declaration so it covered only the employer's power to terminate on three months' notice or pay in lieu. It also noted that a resignation would normally need the employer's acceptance, and it ordered reinstatement with arrears.

This judgment says nothing about how to claim a full-and-final settlement or an experience letter. It lays down no filing deadline either. It does show what the Court examined, and these records match that.

• Gather first: your appointment letter and every version of the service rules, the termination or resignation letter, and any cheque or payment in lieu of notice. Add any show-cause notice, charge-sheet and your replies, plus anything showing the terms were standard-form and not open to negotiation.
• Forum against a State body: if the employer is a government company or other instrumentality of the State, Ganguly and Sengupta filed a writ petition under Article 226 in the High Court. The Court noted a civil suit could give only a declaration and possibly damages, because it cannot order reinstatement in a personal-service contract.
• Forum against other employers: the Court noted that civil courts can declare an instrument void under Section 31(1) of the Specific Relief Act, 1963.
• Mistake to avoid: the officers did not claim the Corporation breached Rule 9(i). They attacked the clause itself as void, so make the same argument. Also do not assume a resignation takes effect on its own, since the Court said it normally needs the employer's acceptance.