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PETITIONER: EMPLOYEES STATE INSURANCE CORPORATION

       Vs.

RESPONDENT: S.K. AGGARWAL AND ORS.

DATE OF JUDGMENT:       31/07/1998

BENCH: M.M. PUNCHHI, SUJATA V. MANOHAR

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T Mrs. Sujata V. Manohar, J.      The respondents  were, at  the material time, directors of a  company M/s.  Indo Japan  Steel Ltd. The company has a factory and head office at calcutta. Under the provisions of Section 40  of the  Employees State Insurance Act, 1948, the "principal employer" is required to pay, in respect of every employee, whether  directly employer,  both  the  employer’s contribution and  the employee’s  contribution.  Under  sub- section (2)  of section  40 the  principal employer,  in the case of an employee directly employed by him, is entitled to recover from  the employee  the employee’s  contribution  by deduction from  his wages.  Under sub-section  (4)  any  sum deducted by the principal employer from wages under this Act shall be  deemed to  have  been  entrusted  to  him  by  the employee for  the purpose  of  paying  the  contribution  in respect of which it was deducted. The complainant who is the appellant before us inspected the head office of the company and found  that the  company  had  deducted  a  sum  of  Rs. 2,223.50 as employees share of contribution from their wages during the  period February  1981  to  September  1981.  The employer, however,  had failed to deposit the said amount in the Employees’  State Insurance  Fund within  the  specified time.      Thereupon the  appellant lodged a complaint against the respondents of  criminal breach  of trust  under Section 405 Explanation 2 of the Indian Penal Code read with Section 406 of the Indian Penal Code. On the basis of this complaint the learned  Magistrate   took  cognizance  and  issued  summons against  the   respondents  to   stand  trial.  The  learned Magistrate also  issued a  search  warrant  for  seizure  of certain  records  of  the  company  as  prayed  for  by  the complainant. Aggrieved  thereby, the  respondents  filed  an application under  Section 401/482 of the Criminal Procedure code for quashing the proceedings in the said case. The High Court by  its impugned  judgment has quashed the proceedings on the  ground that  the respondents cannot be considered as ’employers’ within  the meaning  of Explanation 2 to Section 405 read  with Section  406 of  the Indian Penal Code. Hence they were not liable for prosecution under Section 406. From

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this judgment  the present  appeal has  been  filed  by  the original complainant.      Section 405 Explanation 2 is as follows:-      "405:  Criminal  breach  of  trust:      Whoever,  being   in   any   manner      entrusted with  property,  or  with      any   dominion    over    property,      dishonestly   misappropriates    or      converts  to   his  own   use  that      property, or  dishonestly  uses  or      disposes  of   that   property   in      violation of  any direction  of law      prescribing the  mode in which such      trust is  to be  discharged, or  of      any  legal   contract,  express  or      implied, which he has made touching      the discharge  of  such  trust,  or      wilfully suffers  any other  person      so to  do, commits "criminal breach      of trust".      Explanation 1:....................      Explanation 2:  A person,  being an      employer,    who     deducts    the      employees’  contribution  from  the      wages payable,  to the employee for      credit  to   the  Employees’  State      Insurance     Fund     held     and      administered by the Employees State      Insurance  Act,   1948,  shall   be      deemed to  have been entrusted with      the amount  of the  contribution so      deducted by  him and  if  he  makes      default  in  the  payment  of  such      contribution   to the  said Fund in      violation of the said Act, shall be      deemed to have dishonestly used the      amount of  the said contribution in      violation of  a direction of law as      aforesaid."      Explanation 2  was inserted  by  the  Employees’  State Insurance Amendment  Act 38  of 1975. Explanation 2 makes "a person  being   an  employer"  who  deducts  the  employee’s contribution from  the wages  payable to the employee liable for criminal  breach of trust if he commits a default in the payment  of   such  contribution  to  the  Employees’  State Insurance Fund.  Under Section  11 of  the Indian Penal Code the word  "person" includes  any company  or association  or body of  person whether  incorporated or not. The High Court has held  that the  term "a  person being  an  employer"  in Explanation 2  to Section  405 of  the Indian Penal Code can refer only  to the company who had employed the employees in question.  The  directors  of  that  company  could  not  be considered as  employers under  Explanation 2 to Section 405 of the Indian Penal Code. The complainant, however, contends that Explanation  2 to  Section 405 of the Indian Penal Code should  be  read  in  the  light  of  the  employees’  State Insurance Act,  1948. Under  Section 40  of  the  employees’ State Insurance  Act the  obligation to  pay contribution in the Employees’  State Insurance  Fund has  been cast  on the principal employer.  The relevant  provisions of  Section 40 are as follows:-      "40:  Principal   employer  to  pay      contributions    in    the    first      instance:      (1) The  principal  employer  shall

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    pay in  respect of  every employee,      whether directly employed by him or      by   or    through   an   immediate      employer,   both   the   employee’s      contribution.      (2)    Notwithstanding     anything      contained in  any  other  enactment      but subject  to the  provisions  of      this Act  and the  regulations,  if      any, made thereunder, the principal      employer shall,  in the  case of an      employee directly  employed by  him      (not being  an exempted  employee),      be entitled  to  recover  from  the      employee       the       employees’      contribution by  deduction from his      wages and not otherwise:      Provided  that  no  such  deduction      shall be  made from any wages other      than such  as relate  to the period      or part of the period in respect of      which the  contribution is payable,      or   in    excess   of    the   sum      representing     the     employees’      contribution for the period.      (3)..............      (4)  Any   sum  deducted   by   the      principal employer from wages under      this Act  shall be  deemed to  have      been  entrusted   to  him   by  the      employee for  the purpose of paying      the  contribution   in  respect  of      which it was deducted.      (5)....................." The term  "principal employer" has been defined in Section 2 (17)  of   the  Employees’  State  Insurance  Act,  1948  as follows:-      "2(17): Principal employer" means:-      (i) in  a  factory,  the  owner  or      occupier of  the  factory  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 Factories  Act, 1948]  (63 of      1948); the person so named;      (ii).............................      (iii) in any other establishment,      any person responsible for the      supervision and control of the      establishment." Section 2(17)  defines the "principal employer" in a factory as the  owner or  occupier of  the factory.  "Occupier" of a factory is  defined in  Section 2(15)  as  having  the  same meaning assigned  to it  in the Factories Act, 1948. Section 2(n) of  the Factories Act, 1948 as it stood at the relevant times, defined  an "Occupier"  to mean  the person  who  has ultimate control  over the  affairs of  the factory. Section 100 of  the Factories  Act dealt  with the  determination of occupier in  certain cases.  Under sub-section (2) where the occupier was  a company,  any  directors  thereof  could  be prosecuted and  punished  for  any  offence  for  which  the occupier was liable.      Section 2(17)  of the  Employees’ State  Insurance Act,

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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 Section 40.      The Employees’  State Insurance Act does not define the term "employer"  although under Sections 85B and 850 of that Act the term "employer" is used.      The provisions  of Section  40 in  the light  of  these definitions have  been considered  by various High Courts in order to decided whether a director of a limited company can be considered  as  the  principal  employer  liable  to  pay contribution under  Section 40.  A  division  Bench  of  the Bombay High  Court in the case Suresh Tulsidas Kilachand and Ors. etc.  v. collector  of Bombay  and Ors. etc. (1984 [17] Labour and  Industrial cases 1614) held that a director of a company by  virtue of  being a  director  is  not  principal employer contemplated  by Section  2(17) of  the  Employees’ State Insurance  Act. He  is not  personally liable  to  pay employer’s contribution  under the  Act. In  the context  of Section 2(17)  read with  Section 2(15)  the Court held that whether a  person is  occupier or  not has to be ascertained with reference to whether he is in ultimate control over the factory.   When the  definition  of  principal  employer  in Section 2(17)  refers to  the "owner"  or  "occupier"  of  a factory, the  principal employer  can be either the owner or the occupier  depending upon  the facts  of each  case. when there is  an  owner  of  the  factory  that  owner  must  be considered   as    the   principal   employer   liable   for contribution.      Under Section  40 the words "owner" and "occupier" have been used  disjunctively. The Court also referred to Section 100 of  the Factories  Act and  said  that  even  under  the Factories   Act,   1948,   the   Legislature   has   clearly contemplated that in the case of a factory, a company can be the "occupier".  Therefore, when the owner of a factory is a company it  is the  company which  is the principal employer and not  its director.  The Bombay  High Court overruled the judgment of  the single Judge of the Bombay High Court in so deciding.      The same view has been taken by the Madhya Pradesh High Court in the case of Employees’ State Insurance Corporation, Indore v.  Kailashchandra and  Ors. (1989  [22]  Labour  and Industrial Cases  760). The  Madhya Pradesh  High Court also said that when there is a default in payment of contribution by the  company, the  managing director,  or other directors cannot be  made personally  liable. The  contribution can be recovered from the company as the principal employer.      In the  case of Employees’ State Insurance corporation, chandigarh v.  Gurdial singh  and Ors. (1991 [24] Labour and Industrial Cases  52), this court held that the directors of a private  limited company were not personally liable to pay contributions under the employees’ state Insurance Act, 1948. The  Court was   considering  a case  where a  private limited company  was  the  owner  of  the  factory  and  the occupier of  the factory  had been  dully  named  under  the Factories Act,  1948. The  court said that the directors did not come  within the definition of clause 1 of section 2(17) of the  Employees’ State  Insurance  Act.  This  Court  also disapproved of  the decision of a Single Judge of the Bombay High Court  which has  been subsequently  overruled  by  the Division Bench  of the  Bombay High  Court in  the  case  of suresh Tulsidas  Kilachand and  Ors. etc.  v.  Collector  of Bombay and Ors. etc. (supra).      Therefore, even if we read the definition of "principal

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employer" under  the employees’ State Insurance Act, 1948 in Explanation 2  to section  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 any  event, in  the absence of any express provision in the  Indian Penal  code incorporating  the definition  of "principal employer"  in Explanation  2 to Section 405, this definition cannot be held to apply to the term "employer" in Explanation 2.  As the  High Court  has observed,  the  term "employer"  in  Explanation  2  must  be  understood  as  in ordinary parlance.  In ordinary  parlance it  is the company which is the employer and not its directors either singly or collectively.      In the  premises we  do not see any reason to interfere with the  impugned judgment  of the Calcutta High Court. The appeal is, therefore, dismissed.