Case: P C Agarwala Vs. Payment Of Wages Insp.,M.P.

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 vs. 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." 22. 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 of adopted (Palmers 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. 23. Gower has similarly summarized this position with observation that in a number of important respects, the legislative 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". 24. According to J.K. Industries case (supra) only a Director can be nominated as occupier and not simply an officer or employees. 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. vs. 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. 25. 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]18. 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 other 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 Directors19. 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 led23. Gower has similarly summarized this position with observation that in a number of important respects, the legislative 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"24. According to J.K. Industries case (supra) only a Director can be nominated as occupier and not simply an officer or employees. 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. vs. 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 applicable25. 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