Companies Act Case Law P.C. Aggarwala Vs Payment Of Wages Inspector, M.P. And Ors

CASE NO.:
Appeal (civil) 8300 of 2002

PETITIONER:
P.C. AGGARWALA

RESPONDENT:
PAYMENT OF WAGES INSPECTOR, M.P. AND ORS.

DATE OF JUDGMENT: 26/09/2005

BENCH:
ARIJIT PASAYAT & H.K. SEMA

JUDGMENT:
JUDGMENT

ARIJIT PASAYAT, J.

All these appeals involve identical issues. By judgments rendered by
Division Bench of the Madhya Pradesh High Court, impugned in the appeals
held that Directors of Jiyajirao Cotton Mills Ltd. (hereinafter referred to
as the `Company’) to be personally liable for the payment of wages to the
workmen of the company under the Payment of Wages Act, 1936 (in short the
`Act’). However, the authorities under the Act could proceed against the
assets of the company in the hands of the Directors or the assets acquired
from income of the company by the Directors. The personal property of the
Directors, however, could not be proceeded against if it acquired from the
sources other than the income of the company. The Letters Patent Appeals
filed against the judgments of the learned Single Judge were dismissed. It
is to be noted that learned Single Judge had held that writ petitions were
not maintainable as the writ petitioners had an alternative remedy under
Section 17 of the Act. However, the Letters Patent Court considered the
case on merits and as noted above came to the conclusion about liability of
the Directors.

While the Directors who were writ petitioners had questioned correctness of
the judgments rendered by the Division Bench, the functionaries under the
Act have questioned correctness of that part of the High Court’s judgment
which restricted recovery from the assets acquired out of the company’s
income.

Background facts on which the dispute arises are as under:

In June 1991, the Company made an application to the State Government under
Section 25-O of the Industrial Disputes Act, 1947 (in short the `ID Act’)
as substituted by the Industrial Disputes (Madhya Pradesh Amendment) Act,
1983 (in short `Madhya Pradesh Act’) Act 32 of 1983 with effect from
28.10.1983 seeking permission for closure of cotton section of the Company.
The State Government by order dated 18.8.1991 rejected the application on
the ground that the same was pre-mature and the solution actually lay in
re-deployment of the workforce and technical up-gradation. An application
for review was made on 4.9.1991. Between April 1992 and April 1997
according to the Company all the factories ceased production on account of
disconnection of electricity. One particular trade union filed an
application before the Labour Court in Gwalior under Sections 36, 61 and
64A of the Madhya Pradesh Industrial Relations Act, 1960 (in short the
`MPIR Act’). The Labour Court held that the lay off was illegal and
directed the Company to withdraw the same. On being moved under Section 67
read with Section 64A of the MPIR Act, the Industrial Court by order dated
2.5.1992 modified the same. The order was challenged by a writ petition
before the High Court. An interim order was passed directing payment of 50%
of total back wages plus dearness allowance. Disputes of this nature
continued and on 28.8.1992 the Company made a reference to the Board of
Industrial and Financial Re-construction (in short the `BIFR’) under
Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985
(in short the `SICA’). Subsequently, application was filed by Mazdoor
Congress demanding payment of wages for certain periods. In January 1993
BIFR declared the Company to be a sick industrial company under Section
3(1)(o) of SICA. Notices were issued by the functionaries under the Act
calling upon the Company through its Factory Manager to explain non payment
of wages for certain periods in violation of Section 5 of the Act. For
subsequent periods also, similar notices were issued. Copies of the notices
were endorsed to the Directors of the Company. Subsequently, the Payment of
Wages Inspector filed application under Section 15 of the Act before the
concerned Magistrate against the Factory Manager, Shri K.B. Kaul and eight
others who were Directors of the Company including the present appellants
praying for directions to them for payment of wages for various periods.
The Factory Manager submitted his reply. In particular, it was submitted by
him that the application was vague since details of the workmen whose wages
were allegedly not paid had not been given as required under the law. It
was also stated that notice could not be issued to the Directors as only
the Company and the Factory Manager were responsible for payment of wages
under the Act. Pendency of the proceedings under the BIFR was also referred
to. However, the authorities under the Act rejected the contention and held
that the Directors were also personally liable to pay. Such directions were
questioned before the High Court and as noted above, impugned judgments
were passed.

In support of the appeals, filed by the erstwhile Directors, learned
counsel submitted that the High Court has failed to maintain the
distinction between the liability of the company and its Directors. The
provisions of the Act and the amendments brought in by the Madhya Pradesh
Act of 1964 have not been kept in view. The High Court erroneously
proceeded on the basis as if the Directors were occupiers to hold that the
decision of this Court in J.K. Industries and Ors. v. Chief Inspector of
Factories and Boilers and Ors., [1996] 6 SCC 665 applied to the facts of
the case. In that case the provisions were entirely different and the ratio
of that decision has no application to the facts of the present case. The
stand of the authorities under the Act and the Labour Unions on the other
hand is that looking at the beneficial nature of the statute, the High
Court was justified in its conclusion. In any event, by application of the
principles of legislation by incorporation or by reference the view taken
by the High Court cannot be faulted.

In order to appreciate the rival submissions the relevant provisions under
the Act and the Amendment thereto by Madhya Pradesh Act of 1964 need to be
noted. They are as under:

Section 2. DEFINITIONS.

In this Act, unless there is anything repugnant in the subject or context,

(i) “employed person” includes the legal representative of a deceased
employed person;

(ia) “employer” includes the legal representative of a deceased employer;

(ib) “factory” means a factory as defined in clause (m) of section 2 of the
Factories Act, 1948 (63 of 1948) and includes any place to which the
provisions of that Act have been applied under sub-section (1) of section
85 thereof;

(ii) “industrial or other establishment” means any, –

(a) tramway service, or motor transport service engaged in carrying
passengers or goods or both by road for hire or reward;

(aa) air transport service other than such service belonging to, or
exclusively employed in the military, naval or air forces of the Union or
the Civil Aviation Department of the Government of India;

(b) Dock wharf or jetty;

(c) inland vessel, mechanically propelled;

(d) mine, quarry or oil-field;

(e) plantation;

(f) workshop or other establishment in which articles are produced, adapted
or manufactured, with a view to their use, transport or sale;

(g) establishment, in which any work relating to the construction,
development or maintenance of buildings, roads, bridges or canals, or
relating to operations connected with navigation, irrigation or to the
supply of water, or relating to the generation, transmission and
distribution of electricity or any other form of power is being carried on;

(h) any other establishment or class of establishments which the Central
Government or a State Government may, having regard to the nature thereof,
the need for protection of persons employed therein and other relevant
circumstances, specify, by notification in the Official Gazette;

(iia) “mine” has the meaning assigned to it in clause (j) of sub-section
(1) of section 2 of the Mines Act, 1952 (35 of 1952);

(iii) “plantation” has the meaning assigned to it in clause (f) of section
2 of the Plantations Labour Act, 1951 (69 of 1951);

(iv) “prescribed” means prescribed by rules made under this Act;

(v) “railway administration” has the meaning assigned to it in clause (6)
of section 3 of the Indian Railways Act, 1890 (9 of 1890); and

(vi) “wages” means all remuneration (whether by way of salary, allowance or
otherwise) expressed in terms of money or capable of being so expressed
which would, if the terms of employment, express or implied, were
fulfilled, be payable to a person employed in, respect of his employment or
of work done in such employment, and includes-

(a) any remuneration payable under any award or settlement between the
parties or order of a court;

(b) any remuneration to which the person employed is entitled in respect of
overtime work or holidays or any leave period;

(c) any additional remuneration payable under the terms of employment
(whether called a bonus or by any other name);

(d) any sum which by reason of the termination of employment of the person
employed is payable under any law, contract or instrument which provides
for the payment of such sum, whether with or without deductions, but does
not provide for the time within which the payment is to be made;

(e) any sum to which the person employed is entitled under any scheme
framed under any law for the time being in force;

but does not include –

(1) any bonus (whether under a scheme of profit sharing or otherwise) which
does not form part of the remuneration payable under the terms of
employment or which is not payable under any award or settlement between
the parties or order of a court;

(2) the value of any house-accommodation, or of the supply of light, water,
medical attendance or other amenity or of any service excluded from the
computation of wages by a general or special order of the State Government;

(3) any contribution paid by the employer to any pension or provident fund,
and the interest which may have accrued thereon;

(4) any travelling allowance or the value of any travelling concession;

(5) any sum paid to the employed person to defray special expenses entailed
on him by the nature of his employment; or

(6) any gratuity payable on the termination of employment in cases other
than those specified in sub-clause (d).

3. RESPONSIBILITY FOR PAYMENT OF WAGES.

Every employer shall be responsible for the payment to persons employed by
him of all wages required to be paid under this Act:

Provided that, in the case of persons employed (otherwise than by a
contractor) –

(a) in factories, if a person has been named as the manager of the factory
under [clause (f) of sub-section (1) of section 7 of the Factories Act,
1948 (63 of 1948);

(b) in industrial or other establishments, if there is a person responsible
to the employer for the supervision and control of the industrial or other
establishments;

(c) upon railways (otherwise than in factories), if the employer is the
railway administration and the railway administration has nominated a
person in this behalf for the local area concerned.

The person so named, the person so responsible to the employer, or the
person so nominated, as the case may be; (shall also be responsible) for
such payment.

15. CLAIMS ARISING OUT OF DEDUCTIONS FROM WAGES OR DELAY IN PAYMENT OF
WAGES AND PENALTY FOR MALICIOUS OR VEXATIOUS CLAIMS.

(1) The State Government may, by notification in the Official Gazette,
appoint a presiding officer of any Labour Court or Industrial Tribunal,
constituted under the Industrial Disputes Act, 1947 (14 of 1947) or under
any corresponding law relating to the investigation and settlement of
industrial disputes in force in the State or any Commissioner for Workmen’s
Compensation or other officer with experience as a judge of a Civil Court
or as a stipendiary Magistrate to be the authority to hear and decide for
any specified area all claims arising out of deductions from the wages, or
delay in payment of the wages, of persons employed or paid in that area,
including all matters incidental to such claims :

Provided that where the State Government considers it necessary so
to do, it may appoint more than one authority for any specified
area and may, by general or special order, provide for the
distribution or allocation of work to be performed by them under
this Act.

(2) Where contrary to the provisions of this Act any deduction has been
made from the wages of an employed person, or any payment of wages has been
delayed, such person himself, or any legal practitioner or any official of
a registered trade union authorized in writing to act on his behalf, or any
Inspector under this Act, or any other person acting with the permission of
the authority appointed under sub-section (1), may apply to such authority
for a direction under sub-section (3):

Provided that every such application shall be presented within
twelve months from the date on which the deduction from the wages
was made or from the date on which the payment of the wages was due
to be made, as the case may be:

Provided further that any application may be admitted after the
said period of twelve months when the applicant satisfies the
authority that he had sufficient cause for not making the
application within such period.

(3) When any application under sub-section (2) is entertained, the
authority shall hear the applicant and the employer or other person
responsible for the payment of wages under section 3, or give them an
opportunity of being heard, and, after such further inquiry (if any) as may
be necessary, may, without prejudice to any other penalty to which such
employer or other person is liable under this Act, direct the refund to the
employed person of the amount deducted, or the payment of the delayed
wages, together with the payment of such compensation as the authority may
think fit, not exceeding ten times the amount deducted in the former case
and not exceeding twenty-five rupees in the latter, and even if the amount
deducted or the delayed wages are paid before the disposal of the
application, direct the payment of such compensation, as the authority may
think fit, not exceeding twenty-five rupees :

Provided that no direction for the payment of compensation shall be
made in the case of delayed wages if the authority is satisfied
that the delay was due to –

(a) a bona fide error or bona fide dispute as to the amount payable
to the employed person, or

(b) the occurrence of an emergency, or the existence of exceptional
circumstances, such that the person responsible for the payment of
the wages was unable, though exercising reasonable diligence, to
make prompt payment, or

(c) the failure of the employed person to apply for or accept
payment.

(4) If the authority hearing an application under this section is satisfied

(a) that the application was either malicious or vexatious, the
authority may direct that a penalty not exceeding fifty rupees be
paid to the employer or other person responsible for the payment of
wages by the person presenting the application; or

(b) that in any case in which compensation is directed to be paid
under sub-section (3), the applicant ought not to have been
compelled to seek redress under this section, the authority may
direct that a penalty not exceeding fifty rupees be paid to the
State Government by the employer or other person responsible for
the payment of wages.

(4A) Where there is any dispute as to the person or persons being the legal
representative or representatives of the employer or of the employed
person, the decision of the authority on such dispute shall be final.

(4B) Any inquiry under this section shall be deemed to be a judicial
proceeding within the meaning of sections 193, 219 and 228 of the Indian
Penal Code (45 of 1860).

(5) Any amount directed to be paid under this section may be recovered-

(a) if the authority is a Magistrate, by the authority as if it
were a fine imposed by him as Magistrate, and

(b) if the authority is not a Magistrate, by any Magistrate to whom
the authority makes application in this behalf, as if it were a
fine imposed by such Magistrate.

Amendment to the Payment of Wages Act vide Madhya Pradesh Act of 1964 with
effect from 15.05.1964.

(a) In Section 2 after Clause (i), the following clause has been inserted
namely:

“(i-a) `Industrial Court’ means the Industrial Court constituted
under Section 9 of the Madhya Pradesh Industrial Relations Act,
1960 (27 of 1960)”, and

(b) After Clause (kk) the following clause has been inserted, namely:

“(ii-a) `Legal representative’ means the person who in law
represents the estate of a deceased employed person.

In Section 3, for the proviso, the following proviso has been substituted,
namely:

“Provided that, in the case of persons employed (otherwise than by a
contractor), –

(d) in factories, if a person has been named as the manager of factory
under Clause (f) of sub-section (1) of Section 7 of the Factories Act, 1948
(63 of 1948) then the person so named and the employer jointly and
severally;

(e) in industrial establishments, if there is a person responsible to the
employer for the supervision and control of the industrial establishment,
then the person so responsible and the employer, jointly and severally;

(f) upon railways (otherwise than in factories) if the employer is the
railway administration and the railway administration has nominated a
person in this behalf for the local area concerned, then the person so
nominated; shall be responsible for such payment.”

In Section 15-

(vi) in sub-section (1), for the words, “any Commissioner for workmen’s
compensation or other officer with experience as a Judge of a Civil Court
or as a stipendiary Magistrate to be the authority” the words “one or more
persons to be the authority” shall be substituted;

(vii) after sub-section (1), the following sub-sections shall be inserted,
namely:

“(1-A) A person shall not be qualified for appointment as an
authority under this Act, unless he is a Commissioner for workmen’s
compensation or any other officer with experience as a Judge of
Civil Court or of a Labour Court constituted under the Madhya
Pradesh Industrial Relations Act, 1960 (No. 27 of 1960).

(1-B) Where more than one persons are appointed for any specified
area as authorities under sub-section (1), the State Government may
be general or special order, make arrangements as it thinks fit for
the distribution of work among the authorities so appointed”;

(viii) In sub-section (2),-

(a) after the words “to Act on his behalf, the words, figures and brackets
“or a representative union recognized as such under the Madhya Pradesh
Industrial Relations Act, 1960 (27 of 1960)”, shall be inserted;

(b) after the words, brackets and figure “sub-section (3)”, the words “and
in case of death of the employed person, it shall be lawful for his legal
representative to make an application for such direction” shall be
inserted;

(ix) In sub-section (3),-

(a) after the words “employed person”, the words “or his legal
representatives, as the case may be”, shall be inserted;

(b) for the words “ten rupees in the latter”, the words “twenty-
five rupees in the latter case and the authority may direct the
payment of such compensation in case, where the amount deducted or
the delayed wages are paid by the employer, to the employed person
or his legal representative before the disposal of the application”
shall be substituted;

(c) in the proviso, after the words “employed person” occurring
twice, the words “or his legal representative” shall be inserted,
and-

(x) for sub-section (4), the following sub-sections shall be substituted,
namely:

“(4) if the authority hearing any application under this section is
satisfied,-

(i) that the application was either malicious or vexatious, the
authority may direct that any penalty not exceeding fifty rupees be
paid to the employer or other person responsible for the payment of
wages by the person presenting the application; or

(ii) that, in any case in which compensation is directed to be paid
under sub-section (3), the applicant ought not to have been
compelled to seek redress under this section, the authority may
direct that a penalty not exceeding fifty rupees be also paid by
the employer or other person responsible for the payment of wages
which shall, when paid or recovered, be credited to the State
Government.

(4-A) Where a question arises as to whether any person is or is not a legal
representative of the deceased employed person, such question shall be
determined by the authority appointed under sub-section (1) and his
decision shall be final.

(4-B) The payment of the amount directed to be paid under this section to
the employed person or his legal representative, as the case may be, shall
be full and complete discharge of the employer from the liability to make
such payment under this Act, and no further claim shall lie against the
employer in respect thereof”.

In J.K. Industries’ case (supra), the controversy related to the effect of
1987 amendment. In paras 26, 44 and 62 it was observed as follows:

“26- Thus, we find that after the 1987 amendment, the true import of the
proviso (ii) to Section 2(n) would be that in the case of a company, which
owns the factory, the Company cannot nominate any one of its employees or
officers, except a director of the company, as the occupier of the factory.
In other words an occupier of the factory in the case of a company must
necessarily be any one of its directors who shall be so notified for the
purposes of the Factories Act. Such an occupier cannot be any other
employee of the Company of the Factory. This interpretation of an
`occupier’ would apply to all provisions of the Act, wherever the
expression occupier is used and not merely for the purposes of Section 7 or
7-A of the Act.

44- As already noticed, where the company owns a factory it is the company
which is the occupier, but since company is a legal abstraction without a
real mind of its own, it is those who in fact control and determine the
management of the company, who are held vicariously liable for commission
of statutory offences. The directors of the company are, therefore, rightly
called upon to answer the charge, being the directing mind of the company.
Dealing with the question of vicarious liability of the directors for
offences committed by a company, the following observations of Lord Diplock
in Tesco Supermarkets Ltd. v. Nattrass, (1972) AC 153 are useful:

“In my view, therefore, the question: what natural
persons are to be treated in law as being the company for
the purpose of acts done in the course of its business,
including the taking of precautions and the exercise of
due diligence to avoid the commission of a criminal
offence, is to be found by identifying those natural
persons who by the memorandum and articles of association
or as a result of action taken by the directors, or by
the company in general meeting pursuant to the articles,
are entrusted with the exercise of the powers of the
company. This test is in conformity with the classic
statement of Viscount Haldane, Lord Chancellor, in
Lennard’s Carrying Co. Ltd. v. Asiatic Petroleum Co.
Ltd., (1915 AC 705)

The passage of Viscount Haldane, Lord Chancellor, in Lennard’s Carrying Co.
Ltd., case (supra) referred to by Lord Diplock, is as follows:

“A corporation is an abstraction. It has no mind of its own any
more than it has a body of its own; its active and directing will
must consequently be sought in the person of somebody who for some
purposes may be called an agent, but who is really the directing
mind and will of the corporation, the very ego and centre of the
personality of the corporation. That person may be under the
direction of the shareholders in general meeting; that person may
be the board of directors itself, or it may be, and in some
companies it is so, that that person has an authority coordinate
with the board of directors given to him under the articles of
association…..”.

62.- To sum up our conclusions are:

(1) in the case of a Company, which owns a factory, it is only one of the
directors of the Company who can be notified as the occupier of the factory
for the purposes of the Act and the Company cannot nominate any other
employee to be the occupier of the factory;

(2) Where the Company fails to nominate one of its directors as the
occupier of the factory, the Inspector of the factories shall be at liberty
to proceed against any one of the directors of the company treating him as
deemed occupier of the factory, for prosecution and punishment in case of
any breach or contravention of the provisions of the Act or for offences
committed under the Act.

(3) Proviso (ii) to Section 2(n) of the Act is intra vires the substantive
provision of Section 2(n) of the Act;

(4) Proviso (ii) to Section 2(n) is constitutionally valid and is not ultra
vires Articles 14, 19(1)(g) and 21 of the Constitution of India;

(5) The law laid down by the High Courts of Bombay, Orissa, Karnataka,
Calcutta, Guwahati and Madras is not the correct law and the contrary view
expressed by the High Courts of Allahabad, Madhya Pradesh, Rajasthan and
Patna is the correct enunciation of law in regard to the ambit and scope of
proviso (ii) to Section 2(n) of the Act.”

The judgment was rendered in the background of Section 2(n) proviso (ii) of
the Factories Act, 1948 as amended in 1987. The question involved in the
said case was who can be nominated as occupier by a Company owning the
factory. Considering the said provision, it was held that only one of its
Directors and none of its employees or officers can be nominated as
occupier of the factory by such company. There is no such provision in the
Act like Section 2(n) of the Factories Act. The quoted portion of the Act
as amended only can apply to the fact situation of the present case.
Though, it was contended by learned counsel for the State and the Labour
Unions that Section 3 as amended by the M.P. Amendment Act brought in the
concept of occupier, the contention has only to be noted to be rejected.
Section 3 of the Act and the amended Section 3 by M.P. Amendment Act do not
even by implication bring in the concept of occupier which formed the
foundation in J.K. Industries case (supra).

The principles of legislation by incorporation or by reference have been
dealt with by this Court in many cases.

A distinction has been made between a mere reference or citation of one of
the statutes into another and incorporation. A Statute may instead of
referring to a particular previous statute or to any specific provision
therein refer to the law on the subject generally. In such cases a
reference is construed to mean that the law is as it reads thereafter
including amendments subsequently to the time of adoption, as was noted by
Sutherland; Statutory Construction, Vol. 2, 3rd Edn., p. 550 and supplement
(1956), p. 119.

The legislation by referable incorporation falls into two categories. That
is (i) where a statute by specific reference incorporates the provisions of
another statute as at the time of adoption, and (ii) where a statute
incorporates by general reference. The Law concerning a particular subject
has a genus. In the former case the subsequent amendments made in the
referred statute cannot automatically be read into the adopting statute.
But in the second category it may be presumed that the legislative intent
was to include all the subsequent amendments also made from time to time in
the generic law on the subject adopted by the general reference.

In the former case a modification, repeal or re-enactment of the statute
that is referred will also have effect in the statute in which it is
referred; but in the latter case any change in the incorporation statute by
way of amendment or repeal has no repercussion on the incorporating
statute. The rule that the repeal or amendment of an Act which is
incorporated in a later Act has no effect on the later Act or on the
provisions incorporated therein is subject to four exceptions. They are:
(i) where the later Act and the earlier Act are supplemental to each other,
(ii) where the two Acts are in pari materia, (iii) where the amendment of
the earlier Act if not imported in the later Act would render it wholly
unworkable, and (iv) where the amendment of the earlier Act either
expressly or by necessary intendment also applies to the later Act. Even
though only particular sections of the earlier Act are incorporated into
the later statute, in construing the incorporated provisions it may be
necessary and permissible to refer to other parts of the earlier statute
which are not incorporated. This does not however mean that a provision in
the nature of a proviso or exception in the earlier Act which is not
brought in by incorporation can be read in a manner so as to limit the
meaning of the provision incorporated. Reference to other provisions of the
earlier statute is only permissible to cull out meaning of the provision
incorporated.

In the illuminating words of Lord Esher, M.R.:

“If a subsequent Act brings into itself by reference some of the clauses
of a former Act, the legal effect of that, as has often been held, is to
write those sections into the new Act as if they had been actually written
in it with the pen, or printed on it.” (See Wood’s Estate. Re, ex p Works
and Buildings Commrs., (1886) 31 Ch D 607)

It may be added that clear intention of the incorporating Act cannot be
defeated by such provision of the earlier Act which have not been
incorporated. In the interpretation of an incorporated provision, the Court
is sometimes required to formulate variations of details in the context of
the incorporating statute. (See Mariyappa v. State of Karnataka, [1998] 3
SCC 276). The merit of legislation by incorporation is brevity which is
sometimes counterbalanced by difficulties and obscurities which it is
likely to create.

In Minister of Housing and Local Govt. v. Hartnell, [1965] 1 All ER 490
(HL). It was observed that there is a regrettable modern tendency to overdo
legislation by reference and to attempt brevity at the expense of lucidity.

The amendment to the Factories Act, 1948 (in short `Factories Act’) does
not apply to the M.P. Act. If there is mere reference to a provision
without incorporation, then unless a different intention appears it has to
be considered as reference to the provision. If a provision is incorporated
in another, any subsequent amendment or even its repel would not affect the
provision as incorporation in the latter Statute.

In Employees’ State Insurance Corporation, Chandigarh v. Gurdial Singh and
Ors., [1991] Supp 1 SCC 204 a three-Judge Bench of this Court was
considering the liability flowing from Section 2(17) of the Employees State
Insurance Act, 1948 (in short the `ESI Act’). This Court held as follows:

“This appeal by special leave is directed against the judgment of the High
Court of Punjab & Haryana affirming the decision of the single Judge in a
writ petition. The short question that came before the High Court for
consideration was whether the Directors of a private limited company had
personal liability to meet the demand of contribution arising under the
Employees’ State Insurance Act, 1948. Their liability depended upon the
correct interpretation of the term `principal employer’ appearing in S.
2(17) of the Act. The definition reads thus:

“2(17) `Principal employer’ means;

(i) in a factory, the owner or occupier and includes the managing agent of
such owner or occupier, the legal representative of a deceased owner or
occupier, and where a person has been named as the manager of the factory
under the Factories Act, 1948 (63 of 1948), the person so named;

(ii) in any establishment under the control of any department of any
Government in India, the authority appointed by such Government in this
behalf or where no authority is so appointed, the head of the Department;

(iii) in any other establishment, any person responsible for the
supervision and control of the establishment.”

2. There is no dispute that clause (ii) does not apply. What is relevant to
consider is whether the liability of Directors is covered under clause (i)
and if it is, clause (iii) being residuary would not apply and in case it
is not covered by clause (i), the matter would be regulated by clause
(iii). Admittedly the company had a factory and it is not in dispute that
the occupier of the factory had been duly named. It is also not in dispute
that it had a manager too. In view of the clear terms in the definition, we
are of the view that Directors did not come within clause (i), but the
occupier being there, clause (i) applied and in that view of the matter,
clause (iii) could have no application.

Though the position is slightly different in the Factories Act in view of
the amendment as noted in J.K. Industries case (supra), the view regarding
the personal liability of the Directors is clearly applicable.

It is trite law that liability of a person is dependent upon the statutory
prescriptions governing such liability. Sections 5 and 291 of the Companies
Act, 1956 (in short `Companies Act’) are to be noted in this regard.
Section 5 refers to officer who is in default. Section 291 on the other
hand relates to general powers of the Board of Directors. In order to
attract the liability under the Act, it has to be seen as to on whom the
Act fixes the liability. Section 3 speaks of the responsibility for payment
of wages. It speaks of the “employer” which expression is defined in
Section 2(ia). Section 15 refers to the claims arising out of deductions
from wages or delaying payment of wages and penalty for malicious or
vexatious claims. Statutorily no liability has been fixed on the Directors.

Under Section 3 of the Act as amended by the M.P. Amendment, the liability
is cast on a person who has been named as Manager of the Factory and the
employer jointly. Therefore, in order to find out whether the Director had
a responsibility for making payment, two different things have to be
established: (i) he was the employer or (ii) he was a person who has been
named as Manager of the factory. In the instant case, there is no such
allegation or evidence led.

Considering a case under the `ESI Act’ and certain provisions of the Indian
Penal Code, 1860 (in short the `IPC’), this Court in Employees State
Insurance Corporation v. S.K. Aggrawal and Ors., [1998] 6 SCC 288 observed
as follows:

“4. Sec. 2(17) of the Employees’ State Insurance Act, however, defines the
principal employer as either owner or occupier – taking care of all
eventualities. When the owner of the factory is the principal employer,
there is no need to examine who is occupier. The owner will be the
principal employer under S. 40.

5. The Employees’ State Insurance Act does not define the term “employer”
although under Sections 85B and 85C of that Act the term “employer” is
used.

10. Therefore, even if we read the definition of “principal employer” under
the Employees’ State Insurance Act, 1948 in Explanation 2 to S. 405 of the
Indian Penal Code, the directors of the company, in the present case, would
not be covered by the definition of “principal employer” when the company
itself owns the factory and is also the employer of its employees at the
head office.”

In Tata Engineering and Locomotive Company Ltd. v. State of Bihar and Ors.,
[1964] 6 SCR 885 the basic features of a Company, its corporate existence
and its position vis-a-vis shareholders was highlighted as follows:

“The true legal position in regard to the character of a corporation or a
company which owes its incorporation to a statutory authority is not in
doubt or dispute. The corporation in law is equal to a natural person and
has a legal entity of its own. The entity of the corporation is entirely
separate from that of its shareholders; it bears its own name and has a
seal of its own; its assets are separate and distinct from those of its
members; it can sue and be sued exclusively for its own purpose; its
creditors cannot obtain satisfaction from the assets of its members; the
liability of the members or shareholders is limited to the capital invested
by them; similarly, the creditors of the members have no right to the
assets of the corporation. This position has been well-established ever
since the decision in the case of Salomon v. Salomon & Co., (1897) A.C. 22,
H.L. was pronounced in 1897; and indeed, it has always been the well-
recognised principle of common law. However, in the course of time, the
doctrine that the corporation or a company has a legal and separate entity
of its own has been subjected to certain exceptions by the application of
the fiction that the veil of the corporation can be lifted and its face
examined in substance. The doctrine of the lifting of the veil thus marks a
change in the attitude that law had originally adopted towards the concept
of the separate entity or personality of the corporation. As a result of
the impact of the complexity of economic factors, judicial decisions have
sometimes recognised exceptions to the rule about the juristic personality
of the corporation. It may be that in course of time these exceptions may
grow in number and to meet the requirements of different economic problems,
the theory about the personality of the corporation may be confined more
and more.”

The doctrine of lifting of the veil has been applied, in the words of
Palmer, in five categories of cases: where companies are in relationship of
holding and subsidiary (or sub-subsidiary) companies; where a shareholder
has lost the privilege of limited liability and has become directly liable
to certain creditors of the company on the ground that, with his knowledge,
the company continued to carry on business six months after the number of
its members was reduced below the legal minimum; in certain matters
pertaining to the law of taxes, death duty and stamps, particularly where
the question of the “controlling interest” is in issue; in the law relating
to exchange control, and in the law relating to trading with the enemy
where the test of control is adopted (Palmer’s Company Law, 20th Edn., page
136, now page 215, 24th Edn. 1987). In some of these cases judicial
decisions have no doubt lifted the veil and consider the substance of the
matter.

Gower has similarly summarized this position with observation that in a
number of important respects, the legislature has rent the veil woven by
the Salomon case. Particularly is this so, says Gower, in the sphere of
taxation and in the steps which have been taken towards the recognition of
the enterprise – entity rather than corporate entity. It is significant,
however, that according to Gower the Courts only have construed statutes as
“cracking open the corporate shell” when compelled to do so by the clear
words of the statute – indeed they have gone out of their way to avoid this
construction whenever possible. Thus, at present the judicial approach in
cracking open the corporate shell is somewhat cautious and circumspect. It
is only when the legislative provision justifies the adoption of such a
course that the veil has been lifted. In exceptional cases where courts
have felt “themselves able to ignore the corporate entity and to treat the
individual shareholder as liable for its acts” the same course has been
adopted. Summarizing his conclusions, Gower has classified seven categories
of cases where the veil of corporate body has been lifted. But it would not
be possible to evolve a rational consistent and inflexible principle which
can be invoked in determining the question as to whether the veil of the
corporation should be lifted or not. Broadly, where fraud is intended to be
prevented, or trading with enemy is sought to be defeated, the veil of
corporation is lifted by judicial decision and the shareholders are held to
be “persons who actually work for corporation”.

According to J.K. Industries, case (supra) only a Director can be nominated
as occupier and not simply an officer or employee. This Court observed this
to be the result of the 1987 amendment of the Factories Act. The discretion
of inspector of factories as to occupier can be exercised only where no
director is identified or nominated as an occupier. The decision of this
Court to the effect that only a director of the Company can be appointed as
an occupier of the factory, has been, on the facts of the particular case
distinguished by this Court in Indian Oil Corpn. Ltd. v. Chief Inspector of
Factories, AIR (1998) SC 2456. This Court held that in the case of the
appellant-corporation it will have to be held that the ultimate control
over the affairs of all the factories of the Corporation is really of the
Central Government and, therefore, all the factories of the Corporation
should be regarded as factories owned and controlled by the Central
Government. As there is a special provision governing factories owned and
controlled by the Central Government, the general principle applicable to
non-Government companies was held to be not applicable.

As the High Court has proceeded to hold the Directors liable by introducing
the expression “occupier”, which expression is used in the Factories Act
and not in the Act, the basic premises on which the High Court proceeded
are clearly untenable. Therefore, on a plain reading of the language of the
governing statute, it cannot be held that the Directors had any personal
liability. The judgments of the High Court are therefore not sustainable
and are set aside. In view of the aforesaid conclusion, the appeals filed
by the functionaries under the Act lack merits. However, it shall be in the
interest of employees if the properties of the Company which are stated to
be under the control of Official Liquidator are disposed of early so that
the employees can be paid whatever is legally payable to them. Similarly
the other creditors can be paid and the liability can be discharged.

The appeals filed by the Directors are allowed and the appeals filed by the
functionaries under the Act and the State are dismissed. There shall be no
order as to costs.

 

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