Directors receiving remuneration are employees as per ESI Act

By  Ankit Parhar
 
In Employees' State Insurance Corporation v. Venus Alloy Pvt. Ltd.[See endnote 1], the Supreme Court has held that Directors of a company, who are receiving remuneration, would fall within the definition of an “employee” as provided under Section 2(9) of the Employees' State Insurance Act, 1948 (‘Act’) and that the company is bound to deposit contributions in relation to the remuneration paid to such Directors.

The judgment was passed by the Supreme Court in an appeal arising out of a judgment of the High Court of Madhya Pradesh, wherein the High Court had upheld the decision of the Employees’ State Insurance Court (‘ESI Court') holding that a company is not bound to deposit contributions in relation to the remuneration paid to its Directors.

The facts before the Supreme Court were that during an inspection carried out by the Appellant (‘Corporation’), it was discovered that the Respondent (‘Company’) had not been depositing contributions in relation to the remuneration paid to its Directors. Subsequently, the Corporation raised a demand calling upon the Company to deposit contributions in relation to the remuneration paid to its Directors.

This demand was challenged by the Company before the ESI Court under Section 75 of the Act. The ESI Court referred to the judgment of the Supreme Court in Employees' State Insurance Corporation v. Apex Engineering Pvt. Ltd.[See endnote 2] wherein the Supreme Court had held that the provisions of the Act were applicable to the remuneration received by a ‘Managing Director’. However, the ESI Court held that the judgment in Apex Engineering (supra) would not apply to the remuneration received by a ‘Director’ and set aside the demand raised by the Corporation.

The Corporation challenged the judgment of the ESI Court under Section 82 of the Act before the High Court. The High Court relied upon the judgments of the Bombay High Court in Sakal Papers Pvt. Ltd. v. Employees' State Insurance Corporation[See endnote 3] and Employees' State Insurance Corporation v. Apex Engineering Pvt. Ltd.[See endnote 4] and upheld the decision of the ESI Court.

The Corporation challenged the judgment of the High Court before the Supreme Court. The Corporation relied upon the decisions of the Supreme Court in Apex Engineering (supra) and Saraswath Films v. Regional Director, Employees’ State Insurance Corporation, Trichur[See endnote 5]. The Company argued that the decision in Apex Engineering (supra) was distinguishable as the Managing Director in that case was discharging additional duties over and above his duties as a Director.

The Supreme Court referred to the definitions of the terms “employee” and “wages” as provided in Section 2(9) and Section 2(22) of the Act, respectively. The Supreme Court also referred to the judgment in Saraswath Films (supra), wherein it was held that the definition of the term "employee" under Section 2(9) of the Act is wide and comprehensive. The Supreme Court referred to the relevant portions of the judgment in Apex Engineering (supra) wherein it was held that there was nothing in the Act to indicate that a ‘Managing Director’ cannot also be an ‘employee’ for the purposes of the Act. After referring to the relevant provisions of the Act and the judgments stated above, the Supreme Court concluded that the ratio of Apex Engineering (supra) applies with greater force in relation to a Director of the Company, if the Director is paid remuneration for discharging the duties entrusted to him.

The Supreme Court also stated that the manner in which the ESI Court attempted to distinguish the decision of the Supreme Court in Apex Engineering (supra) was ‘curious’ and that the High Court fell in error by failing to appreciate that the decisions of the Bombay High Court in Sakal Papers (supra) and Apex Engineering (supra) stood effectively overruled by the decision of the Supreme Court in Apex Engineering (supra).

The judgment of the Supreme Court in Apex Engineering (supra) had settled the issue as far as the remuneration received by a ‘Managing Director’ is concerned. Even though it is apparent that the ratio of the said decision would squarely apply to the remuneration received by a ‘Director’, it appears that the ESI Court and the High Court failed to appreciate the position. With this judgment, one can hope that the issue of the applicability of the Act to the remuneration received by any Director of a company would finally stand settled.

[The author is a Joint Partner in Corporate practice, Lakshmikumaran & Sridharan, New Delhi]

Endnotes