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

3. 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) 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 on 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.  4. 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 others vs. Chief Inspector of Factories and Boilers and others (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.

Court's reasoning:
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