Case: Employees State Insurance Corporation Vs. M/S. Apex Engineering Pvt. Ltd

2. Background Facts Respondent is a private limited company incorporated under the Companies Act, 1958. It is engaged in the manufacture of motor seats. Its factory at the relevant time was located in M.I.D.C. Nagpur. It also had a branch factory at Nagpur. On or about 9th September 1969 the Board of Directors of the respondent-company resolved to elect one of the directors Shri V.N. Dhanwate as Managing Director of the company and also conferred on him the authority to borrow, invest and lend the funds with certain limitation specified in the Resolution. The Board of Directors also resolved to grant annual remuneration of Rs. 12,000 to Shri Dhanwate for rendering services as Managing Director. The appellant-Corporation by its communication dated 23rd May, 1974 informed the respondent-company that Shri Dhanwate being the Managing Director who was also paid a regular remuneration was to be included along with other 19 employees engaged for wages by the company for the purpose of coverage of the company as a factory under Section 2 sub-section (12) of the Act. After considering all the facts and circumstances the appellant-Corporation by its order dated 1 st July, 1974 directed that the company be covered as a factory under Section 2 sub- section (12) of the Act and hence it was directed to comply with the provisions of the Act3. Being aggrieved by the appellants decision the respondent-company moved an application under Section 75 read with Section 76 of the Act before the Employees State Insurance Court. The Insurance Court by its judgment dated 5th September 1975 allowed the application of the respondent-company and held that the company is not covered by Section 2, sub-section(12) of the Act as it had only 19 employees and Shri Dhanwate cannot be treated to be an employee within the meaning of Section 2, subsection (9) of the Act and hence the company cannot be said to have employed20 employees so as to be covered as a factory under Section 2, sub-section (12) of the Act. The said decision of the ESI Court was challenged before the High Court in appeal. Learned Single Judge of the High Court agreed with the ESI Court and dismissed the appeal. The appellant-Corporation thereafter carried the matter in Letters Patent Appeal under Clause 15 thereof. The Division Bench of the High Court by the impugned judgment dismissed the said appeal and concurred with the view of the learned Single Judge that the Managing Director Shri Dhanwate could not be held to be an employee within the meaning of Section 2 sub-section (9) of the Act.

Court's reasoning:
16. The aforesaid decision of this Court clearly rules that the Managing Director while acting as such can have dual capacity both as Managing Director on the one hand and as servant or employee of the company on the other. The Division Bench in the impugned judgment with respect was in error in by passing the ratio of the aforesaid decision of this Court by observing that it was a judgment rendered under the Income Tax Act and, therefore, it had no bearing on the scheme of the present Act. We also find that the Division Bench was equally in error when it placed reliance for its decision on the judgment of this Court in the case of Regional Director Employees State Insurance Corporation Trichur v. Ramanuja Match Industries, 1985 (2) SCR 119. In the said decision a Bench of two learned Judges of this Court held that a partner of a firm receiving salary is not an employee within the meaning of Section 2 sub-Section (9) of the Act. Ranganath Misra, J, (as he then was), speaking for this Court held that the partners cannot be held employees of the partnership firm. A partnership firm is not a legal entity and in a partnership firm each partner acts as an agent of the other. The position of a partner qua the firm is thus not that of a master and a servant or employer and employee which concept involved an element of subordination and not that of equality. The partnership business belongs to the partners and each one of them is an owner thereof. In common parlance the status of a partner qua the firm is thus different from employees working under the firm. It may be that a partner is being paid some remuneration for any special attention, which he devotes but that would not involve any change of status and bring him within the definition of employee17. We fail to appreciate how these observations can ever be pressed in service on the facts of the present in service on the facts of the present case. Respondent-Company is not a partnership firm. It is a separate legal entity. It has chosen one of its directors to act as Managing Director on payment of remuneration for the extra work to be done by him as such. He has to discharge his functions as Managing Director under the supervision of the entire Board of Directors. Thus there is employer-employee relationship between two separate entities. On the one hand is the Managing Director employed as such and on the other respondent-company being a separate legal entity which employs him. In this connection we may also usefully refer to a decision of this Court in the case of Bacha F. Guzdar v. Commissioner of Income - Tax, Bombay, 1955 (1) SCR 876. A Constitution Bench of this Court Speaking through Ghulam Hasan, J., brought out the clear legal distinction between a firm and a company by observing that the position of a shareholder of a company is altogether different from that of a partner of a firm. A company is a juristic entity distinct from the shareholders but a firm is a collective name or an alias for all the partners. Of course the decision was rendered in the light of Income - tax Act wherein the question was whether agricultural income would include the dividend paid to a shareholder of a company18. It must, therefore, be held that the Managing Director of respondent-company could not be treated on par with partner of a partnership firm being given some remuneration for his extra work. The decision of this court in Ramanuja Match Industries, 1985 (2) SCR 119  was, therefore, clearly inapplicable to the facts of the present case and was erroneously pressed in service by the Division Bench of the High Court in the impugned judgment in deciding the appeal of the appellant-Corporation21. In the case of Non-Ferrous Rolling Mills (P) Ltd. v. the Regional Director Employees State Insurance Corporation, Madras, 1977 Lab. I.C. 1706 a learned Single Judge of the High Court of Madras held that a director of a private limited company appointed on remuneration to be the Managing Director of the factory could still be said to be an employee of the company as he was getting wages within the meaning of Section 2 sub-section (22) of the Act. It was also held that even if the director of the company was entrusted with the work of managing the factory and thus could be treated to be principal employer (17) of the Act, he could still be treated as an employee of the company within the meaning of Section 2(9) of the Act as he satisfied all the relevant conditions of the said definition24. The decision of the Madras High Court following the aforesaid decisions lays down the correct legal position. Thus even assuming that Shri dhanwate was a principal employer even then in the light of the aforesaid discussion it has to be held that he could have a dual capacity both as a Managing Director on the one hand and as an employee of the company on the otherIt is clear from the scheme of the Act that there is no apparent conflict of interest between the principal employer and the employee and there is no reason why if a person falls within the definition of principal employer he cannot in certain cases be also an employee. In our view, the aforesaid decision squarely falls in line with scheme of the Act and the decisions of other High Courts on the point to which we have made a reference earlier27. The aforesaid observations, in our view, are not borne out from the express language of Section 2 sub-section (22) of the Act which defines wages to include any type of remuneration paid or payable to an employee, if a person satisfies the definition of the term employee as found in Section 2 sub- section (9) of the Act and is paid remuneration for discharging the extra work assigned to him for earning such remuneration it cannot be said that it would not be wages as wrongly assumed by the High Court in the aforesaid decision in paragraph 24 of the Report28. As a result of the aforesaid discussion it must be held that the Division Bench of the High Court in the impugned judgment had erred in taking the view, on the facts of the present case, that Shri Dhanwate as Managing Director of the company was not an employee within the meaning of Section 2 sub- section (9) of the Act. On the other hand it must be held that he was an employee of the company and as such could be added to the list of remaining 19 employees so as to make a total of 20 for covering the establishment under Section 2 sub-section (12) of the Act which defined factory to mean, any premises including the precincts thereof-(a) ....or (b) whereon twenty or more persons are employed or were employed for wages on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power or is ordinarily so carried on.