1. Dispute over whether a Managing Director receiving remuneration in a private limited company qualifies as an employee under Section 2(9) of the Employees State Insurance Act, 1948. (Para 1 , 2 , 3 )
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1997 Supreme(SC) 1430
1997(9) Supreme 362
SUPREME COURT OF INDIA
(From Bombay High Court)
S.B. Majmudar & M. Jagannadha Rao, JJ.
Employees State Insurance Corporation -Appellant
versus
M/s. Apex Engineering Pvt. Ltd. -Respondent
Civil Appeal No. 3411 of 1996
Decided on 6-11-1997
Counsel for the Parties :
For the Appellant : Vijay K. Mehta, Advocate.
For the Respondent : S. Wasim A. Qadri, Advocate.
Important Points
A Managing Director of a private limited company can be considered an 'employee' under Section 2(9) of the ESI Act, 1948, if they are employed for wages and satisfy the definition's criteria. Such a person can simultaneously hold the capacity of both a principal employer and an employee.
Subject
Employment - Employee Definition
Act Referred
COMPANIES ACT: S.2(2)(6)
EMPLOYEES STATE INSURANCE CORPORATION ACT: S.2(2)(2), S.2(9), S.2(1)(7), S.2(1)(2)
FACTORIES ACT: S.2(n)
EMPLOYEES STATE INSURANCE CORPORATION ACT: S.2(2)(2), S.2(9), S.2(1)(7), S.2(1)(2)
FACTORIES ACT: S.2(n)
Headnote
Employees State Insurance Corporation Act, 1948-Section 2(9)-Employee-Meaning-Requirements of Section 2(9)-One of the directors of a company entrusted with work of Managing Director on remuneration-He was a person employed for wages-Whether he could be held as an employee within the meaning of Section 2 sub-section (9) of the Act?-(Yes)-Though he was a principal employer, he could have a dual capacity both as a Managing Director and also as an employee of the company. (Paras 12 & 13)
Legal Category Hierarchy
Table of Contents
2. Whether a Managing Director can simultaneously be a principal employer and an employee, and whether directorial status precludes employment under the ESI Act. (Para 4 , 5 )
3. A company is a separate legal entity; a Managing Director paid remuneration for specific duties satisfies the criteria of an employee regardless of their directorial status. (Para 6 , 7 , 8 , 9 , 10 , 11 , 12 )
4. A Managing Director of a private limited company can hold dual capacity as both a director and an employee if the conditions of Section 2(9) are satisfied. (Para 8 , 12 )
5. Appeal allowed; the Managing Director is held to be an employee, and the establishment is covered as a factory under the ESI Act. (Para 13 , 15 )
6. Can a Managing Director of a private limited company be considered an employee under the ESI Act?
Yes, if the Managing Director is employed for wages in connection with the work of the factory or establishment and satisfies the conditions of Section 2(9). Because a company is a separate legal entity, the Managing Director is not self-employed and can be an employee of the company. (Para 6 , 9 )
7. Can a person simultaneously hold the status of principal employer and employee under the ESI Act?
Yes, a person can have dual capacity. There is no apparent conflict of interest or legal bar in the Act preventing a person who satisfies the definition of a principal employer from also satisfying the requirements of an employee. (Para 8 , 12 )
8. How does the employment status of a company director differ from that of a partner in a partnership firm?
A company is a separate juristic entity, whereas a partnership firm is not. A partner is an owner and agent of other partners, not a servant. In contrast, a Managing Director can be a servant or employee of the corporate entity. (Para 8 , 9 , 10 )
9. Does exercising supervisory or administrative control over a factory preclude a person from being an employee?
No. Ultimate control in a company vests in the Board of Directors. A Managing Director exercising day-to-day or supervisory control under the Board's supervision can still be an employee if they are paid wages for their services. (Para 7 , 8 )
JUDGMENT
S.B. Majmudar, J.-Employees State Insurance Corporation has brought in challenge judgment and order rendered by a Division Bench of the High Court of Bombay, Nagpur Bench in Letters Patent appeal whereunder the Division Bench confirmed the order of the learned Single Judge holding that the Managing Director of the respondent-company is not an employee as defined in Section 2(9) of the EMPLOYEES STATE INSURANCE CORPORATION ACT , 1948 (hereinafter referred to as the Act ). The present appeal on grant of special leave to appeal under Article 136 of the Constitution of India reached final hearing before us. We have heard learned advocate for the appellant-Corporation as well as learned advocate Shri S. Wasim A. Qadri, who was requested by us to assist the Court as amicus curiae, as respondent-company being served has not thought it fit to appear through any counsel. Before considering the main question in the controversy between the parties it is necessary to note the backdrop facts leading to these proceedings.
Background Facts
2. Respondent is a private limited company incorporated under the Companies Act, 1956. 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 1st 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 Act.
3. Being aggrieved by the appellant s 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 sub-section (9) of the Act and hence the company cannot be said to have employed 20 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.
Contentions of Learned Counsel
4. In support of the appeal the learned counsel for the appellant-Corporation vehemently contended that the decision rendered by the ESI Court and as confirmed by the learned Single Judge and the Division Bench of the High Court did not correctly interpret the relevant provisions of the Act especially Section 2 sub-section (9) and Section 2 sub-section (22) of the Act
