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Directors Of A Company, Receiving Remuneration Are ‘Employees’ Under ESI Act: SC [Read Judgment]

By LawStreet News Network      06 February, 2019 12:00 AM      0 Comments

The Supreme Court on February 5, 2019, in the case of Employees' State Insurance Corporation v. Venus Alloy Pvt. Ltd., has held that Directors of a Company, who are receiving remuneration, are ‘employees’ under sub-section (9) of Section 2 of the Employees' State Insurance Act, 1948.

A Bench comprising of Justices Abhay Manohar Sapre and Dinesh Maheshwari was hearing an appeal filed against the order passed by the Madhya Pradesh High Court wherein it had held that the Directors of the establishment do not come within the purview of the "employees", as defined under sub-section (9) of Section 2 of the ESI Act, 1948.

In this case, the Employees' State Insurance Corporation directed the Company to make payment of contribution in relation to the remuneration paid to the Directors. Such a demand was questioned by the Company by way of an application under Section 75 of the ESI Act that was considered and decided by the Employees State Insurance Court at Indore. The ESI Court observed that the Directors do not fall under the category of employees and declared the order passed by the Corporation as void and unfair. This decision of the ESI Court was affirmed by the Madhya Pradesh High Court. Aggrieved by the decision the Corporation filed an appeal before the Supreme Court.

The Bench took into consideration a judgment passed in the case of Employees' State Insurance Corporation v. Apex Engineering Pvt. Ltd., where the question for consideration was as to whether the said Managing Director was an "employee" within the meaning of Section 2(9) of the ESI Act? Though the High Court and the ESI Court had answered this question against the Corporation, but the Supreme Court allowed the appeal and, inter alia, held that the Managing Director, even when to be treated as principal employer, could also be an employee and could carry such dual capacity.

In view of the Apex Engineering case, the Bench said that "what has been observed and held by this Court in Apex Engineering (supra), in relation to the Managing Director of a Company, applies with greater force in relation to a Director of the Company, if he is paid the remuneration for discharge of the duties entrusted to him."

Further, the Bench noted that the corporation, in the present case, had asserted that the Directors of the Company were paid remuneration at the rate of Rs. 3,000/- p.m. and they were falling within the definition of "employee" under the ESI Act and hence, contribution was payable in regard to the amount paid to them. The Bench observed that the order passed by the Corporation was challenged by the Company only on the contention that the Directors do not fall within the category of "employee". But no attempt was made to show as to how and why the remuneration paid to its Directors would not fall within the purview of "wages" as per the meaning assigned by sub-section (22) of Section 2 of the ESI Act, the Bench added.

The Bench set aside the orders of the ESI Court as well as that of the Madhya Pradesh High Court while observing that "The ESI Court cursorily attempted to distinguish the decision of this Court in Apex Engineering (supra) only with reference to the fact that therein, the amount was being received by the Managing Director. The High Court, on the other hand, overlooked the said decision of this Court and relied only on the decisions of the Bombay High Court though the propositions in the referred decisions of the Bombay High Court stood effectively overruled by the decision in Apex Engineering (supra) where this Court held in no uncertain terms that the High Court was in error in taking the view that the Managing Director of the Company was not an employee within the meaning of Section 2 (9) of the ESI Act. The said decision directly applies to the present case and we have no hesitation in concluding that the High Court in the present case has been in error in assuming that the Director of a Company, who had been receiving remuneration for discharge of duties assigned to him, may not fall within the definition of an employee for the purpose of the ESI Act."

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