1998 (7) TMI 516 - SC - Companies Law

Whether a director of a limited company can be considered as a principal employer liable to pay contributions under section 40? Held that - Appeal dismissed. 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.

Summary

Issues:
Interpretation of section 405, Explanation 2 of the Indian Penal Code in relation to liability of directors as employers for non-payment of employees' contributions to the Employees' State Insurance Fund.

Analysis:
The judgment revolves around the interpretation of section 405, Explanation 2 of the Indian Penal Code concerning the liability of individuals as employers for the non-payment of employees' contributions to the Employees' State Insurance Fund. The case involved directors of a company who were accused of criminal breach of trust for deducting but not depositing employees' contributions to the fund. The High Court quashed the proceedings, stating that the directors could not be considered as "employers" under the relevant sections of the Indian Penal Code.

The primary contention was whether the directors could be held liable as employers under Explanation 2 to section 405 of the Indian Penal Code. The complainant argued that the definition of "principal employer" in the Employees' State Insurance Act, 1948, should be considered in interpreting the term "employer." The Act defines the principal employer as the owner or occupier of a factory, with the owner being the principal employer when the factory is owned by a company.

Various High Courts' decisions were cited to determine the liability of directors as principal employers under section 40 of the Employees' State Insurance Act. The Bombay and Madhya Pradesh High Courts held that directors of a company were not personally liable for contributions, with the company being responsible as the principal employer. The Supreme Court concurred, emphasizing that the term "employer" in Explanation 2 should be understood in ordinary parlance, where the company itself is considered the employer, not its directors.

Ultimately, the Supreme Court upheld the High Court's decision, dismissing the appeal and affirming that the directors in the case were not covered by the definition of "principal employer." The judgment clarified that the liability for non-payment of employees' contributions rested with the company as the employer, not its directors individually or collectively.