Important point
Under the Payment of Wages Act, on a plain reading of the language of the governing statute, it cannot be held that the Directors of the company have any personal liability to pay wages to the workmen of the company.

Headnote:(i) Payment of Wages Act, 1936 As Amended by Madhya Pradesh Act of 1964—Sections 2, 3 and 15—Companies Act, 1956—Sections 5 and 291—Liability for payment of wages to workmen of the company—Under Section 3 of the Act as amended by the M.P. Amendment, liability is cast on a person who has been named as Manager of the Factory and the employer jointly —Whether Director had a responsibility for making payment—Company made an application to the State Government u/s 25-O of Industrial Disputes Act as substituted by Industrial Disputes (M.P. Amendment) Act seeking permission for closure of cotton section of the Company—Between April 1992 and April 1997 according to the company all the factories ceased production on account of disconnection of electricity—Labour Court held that lay off was illegal—Writ petition—An interim order was passed directing payment of 50 of total back wages plus dearness allowance—In January 1993 BIFR declared the company to be a sick industrial—Notices were issued calling upon the company through its Factory Manager to explain non payment of wages for certain periods—Authorities under the Act held that Directors were also personally liable to pay—Appeals—High Court held Directors of the company to be personally liable for payment of wages to the workmen of the company—Whether judgments of the High Court are sustainable—(No)—Under the Act, it cannot be held that Directors had any personal liability.
       Held : It is trite law that liability of a person is dependent upon the statutory prescriptions governing such liability. Sections 5 and 291 of the Companies Act, 1956 (in short ‘Companies Act’) are to be noted in this regard. Section 5 refers to officer who is in default. Section 291 on the other hand relates to general powers of the Board of Directors. In order to attract the liability under the Act, it has to be seen as to on whom the Act fixes the liability. Section 3 speaks of the responsibility for payment of wages. It speaks of the “employer” which expression is defined in Section 2(ia). Section 15 refers to the claims arising out of deductions from wages or delaying payment of wages and penalty for malicious or vexatious claims. Statutorily no liability has been fixed on the Directors. Under Section 3 of the Act as amended by the M.P. Amendment, the liability is cast on a person who has been named as Manager of the Factory and the employer jointly. Therefore, in order to find out whether the Director had a responsibility for making payment, two different things have to be established; (i) he was the employer or (ii) he was a person who has been named as Manager of the factory. In the instant case, there is no such allegation or evidence led. (Paras 18 and 19)
       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. (Para 25)
       (ii) Companies Act, 1956—Sections 5 and 291—Lifting corporate veil—Applicability of the doctrine—Liability of Directors of a company for payment of wages—Determination of.
       Held : The doctrine of lifting of the veil has been applied, in the words of Palmer, in five categories of cases: where companies are in relationship of holding and subsidiary (or sub-subsidiary) companies; where a shareholder has lost the privilege of limited liability and has become directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business six months after the number of its members was reduced below the legal minimum; in certain matters pertaining to the law of taxes, death duty and stamps, particularly where the question of the “controlling interest” is in issue; in the law relating to exchange control, and in the law relating to trading with the enemy where the test of control is adopted (Palmer’s Company Law, 20th Edn., page 136, now page 215, 24th Edn. 1987). In some of these cases judicial decisions have no doubt lifted the veil and consider the substance of the matter. Gower has similarly summarized this position with observation that in a number of important respects, the legislature has rent the veil woven by the Salomon case. Particularly is this so, says Gower, in the sphere of taxation and in the steps which have been taken towards the recognition of the enterprise - entity rather than corporate entity. It is significant, however, that according to Gower the Courts only have construed statutes as “cracking open the corporate shell” when compelled to do so by the clear words of the statute - indeed they have gone out of their way to avoid this construction whenever possible. Thus, at present the judicial approach in cracking open the corporate shell is somewhat cautious and circumspect. It is only when the legislative provision justifies the adoption of such a course that the veil has been lifted. In exceptional cases where courts have felt “themselves able to ignore the corporate entity and to treat the individual shareholder as liable for its acts” the same course has been adopted. Summarizing his conclusions, Gower has classified seven categories of cases where the veil of corporate body has been lifted. But it would not be possible to evolve a rational consistent and inflexible principle which can be invoked in determining the question as to whether the veil of the corporation should be lifted or not. Broadly, where fraud is intended to be prevented, or trading with enemy is sought to be defeated, the veil of corporation is lifted by judicial decision and the shareholders are held to be “persons who actually work for corporation”. (Paras 22 and 23)
       (iii) Interpretation of Statutes—Principle of legislation by incorporation or by reference—Interpretation of incorporated provision.
       Held : A distinction has been made between a mere reference or citation of one of the statutes into another and incorporation. A Statute may instead of referring to a particular previous statute or to any specific provision therein refer to the law on the subject generally. In such cases a reference is construed to mean that the law is as it reads thereafter including amendments subsequently to the time of adoption. (Para 9)
       It may be added that clear intention of the incorporating Act cannot be defeated by such provision of the earlier Act which have not been incorporated. In the interpretation of an incorporated provision, the Court is sometimes required to formulate variations of details in the context of the incorporating statute. (See Mariyappa v. State of Karnataka (1998) 3 SCC 276). The merit of legislation by incorporation is brevity which is sometimes counterbalanced by difficulties and obscurities which it is likely to create. (Para 13)

Judgment

Arijit Pasayat, J.—All these appeals involve identical issues. By judgments rendered by Division Bench of the Madhya Pradesh High Court, impugned in the appeals held that Directors of Jiyajirao Cotton Mills Ltd. (hereinafter referred to as the ‘Company’) to be personally liable for the payment of wages to the workmen of the company under the Payment of Wages Act, 1936 (in short the ‘Act’. However, the authorities under the Act could proceed against the assets of the company in the hands of the Directors or the assets acquired from income of the company by the Directors. The personal property of the Directors, however, could not be proceeded against if it acquired from the sources other than the income of the company. The Letters Patent Appeals filed against the judgments of the learned Single Judge were dismissed. It is to be noted that learned Single Judge had held that writ petitions were not maintainable as the writ petitioners had an alternative remedy under Section 17 of the Act. However, the Letters Patent Court considered the case on merits and as noted above came to the conclusion about liability of the Directors.

2. While the Directors who were writ petitioners had questioned correctness of the judgments rendered by the Division Bench, the functionaries under the Act have questioned correctness of that part of the High Court’s judgment which restricted recovery from the assets acquired out of the company’s income.

3. Background facts on which the dispute arises are as under:

In June 1991, the Company made an application to the State Government under Section 20-O of the Industrial Disputes Act, 1947 (in short the ‘ID Act’) as substituted by the Industrial Disputes (Madhya Pradesh Amendment) Act, 1983 (in short ‘Madhya Pradesh Act’) Act 32 of 1983 with effect from 28.10.1983 seeking permission for closure of cotton section of the Company. The State Government by order dated 18.8.1991 rejected the application on the ground that the same was pre-mature and the solution actually lay in re-deployment of the workforce and technical up-gradation. An application for review was made on 4.9.1991. Between April 1992 and April 1997 according to the Company all the factories ceased production on account of disconnection of electricity. One particular trade union filed an application before the Labour Court in Gwalior under Sections 36, 61 and 64A of the Madhya Pradesh Industrial Relations Act, 1960 (in short the ‘MPIR Act’). The Labour Court held that the lay off was illegal and directed the Company to withdraw the same. On being moved under Section 67 read with Section 64A of the MPIR Act, the Industrial Court by order dated 2.5.1992 modified the same. The order was challenged by a writ petition before the High Court. An interim order was passed directing payment of 50 of total back wages plus dearness allowance. Disputes of this nature continued and on 28.8.1992 the Company made a reference to the Board of Industrial and Financial Reconstruction (in short the ‘BIFR’) under Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (in short the ‘SICA’). Subsequently, application was filed by Mazdoor Congress demanding payment of wages for certain periods. In January 1993 BIFR declared the Company to be a sick industrial company under Section 3(1)(o) of SICA. Notices were issued by the functionaries under Act calling upon the Company through its Factory Manager to explain non payment of wages for certain periods in violation of Section 5 of the Act. For subsequent periods also, similar notices were issued. Copies of the notices were endorsed to the Directors of the Company. Subsequently, the Payment of Wages Inspector filed application under Section 15 of the Act before the concerned Magistrate against the Factory Manager, Shri K.B. Kaul and eight others who were Directors of the Company including the present appellants praying for directions to them for payment of wages for various periods. The Factory Man

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2005 Supreme(SC) 1236

Important pointUnder the Payment of Wages Act, on a plain reading of the language of the governing statute, it cannot be held that the Directors of the company have any personal liability to pay wages to the workmen of the company.

Cases Referred (5)

Important point
Under the Payment of Wages Act, on a plain reading of the language of the governing statute, it cannot be held that the Directors of the company have any personal liability to pay wages to the workmen of the company.