2005 (9) TMI 305 - SC - Companies Law

Whether the Directors of a private limited company had personal liability to meet the demand of contribution arising under the Employees State Insurance Act, 1948? Held that - The appeals filed by the Directors are allowed and the appeals filed by the functionaries under the Act and the State are dismissed. 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.

Issues Involved:
1. Liability of Directors for payment of wages under the Payment of Wages Act, 1936.
2. Applicability of the concept of "occupier" from the Factories Act, 1948 to the Payment of Wages Act.
3. Interpretation of statutory provisions and amendments under the Payment of Wages Act and the Madhya Pradesh Amendment Act, 1964.
4. Principles of legislation by incorporation or by reference.
5. Personal liability of Directors under various statutes.

Detailed Analysis:

1. Liability of Directors for Payment of Wages:
The core issue was whether the Directors of a company could be held personally liable for the payment of wages to the workmen under the Payment of Wages Act, 1936. The Madhya Pradesh High Court had held that Directors were personally liable, but this was challenged. The Supreme Court observed that under Section 3 of the Act, as amended by the Madhya Pradesh Amendment Act, the liability is cast on the person named as the Manager of the factory and the employer jointly. There was no statutory provision fixing liability on the Directors personally.

2. Applicability of the Concept of "Occupier":
The High Court had erroneously applied the concept of "occupier" from the Factories Act, 1948 to hold the Directors liable. The Supreme Court clarified that there is no provision in the Payment of Wages Act similar to Section 2(n) of the Factories Act, which defines "occupier". The concept of "occupier" was foundational in the J.K. Industries Ltd. case but did not apply to the Payment of Wages Act.

3. Interpretation of Statutory Provisions and Amendments:
The relevant provisions under the Payment of Wages Act and the Madhya Pradesh Amendment Act, 1964 were examined. Section 3 of the Act, as amended, specifies that the person named as the Manager and the employer are jointly responsible for the payment of wages. The Supreme Court noted that the High Court failed to maintain the distinction between the liability of the company and its Directors and did not consider the specific amendments brought by the Madhya Pradesh Act of 1964.

4. Principles of Legislation by Incorporation or by Reference:
The Court discussed the principles of legislation by incorporation or by reference, highlighting that there is a distinction between a mere reference to a statute and incorporation of its provisions. In the former, subsequent amendments to the referred statute apply, while in the latter, they do not unless explicitly stated. The Court concluded that the amendments to the Factories Act did not apply to the Payment of Wages Act by mere reference.

5. Personal Liability of Directors under Various Statutes:
The Supreme Court referred to several cases, including Employees' State Insurance Corporation v. Gurdial Singh and Tata Engineering and Locomotive Company Ltd. v. State of Bihar, to emphasize that the liability of Directors is dependent on statutory prescriptions. The Court reiterated that for the Directors to be held liable under the Payment of Wages Act, it must be established that they were either the employer or named as the Manager of the factory, which was not the case here.

Conclusion:
The Supreme Court set aside the judgments of the Madhya Pradesh High Court, holding that the Directors did not have personal liability for the payment of wages under the Payment of Wages Act. The appeals filed by the Directors were allowed, and those filed by the functionaries under the Act were dismissed. The Court also suggested that the properties of the company under the control of the Official Liquidator be disposed of early to pay the employees and other creditors.

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