Case: Employees State Insurance Corporation Vs. S.K. Aggarwal

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 employed by him or by or through an immediate employer, both the employers contribution and the employees contribution. Under(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 employees contribution by deduction from his wages. Under(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.2. 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 this judgment the present appeal has been filed by the original complainant.

Court's reasoning:
9. 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 duly 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).10. Therefore, even if we read the definition of "principal 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.11. 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.