Holding

A Managing Director of a private limited company, when appointed on remuneration and performing duties connected with the factory administration, qualifies as an "employee" under Section 2(9) and can be counted towards the statutory employee threshold for ESIC coverage.

Summary

The Employees' State Insurance Corporation (ESIC) sought to include the Managing Director (MD) of Apex Engineering Pvt. Ltd., Shri V.N. Dhanwate, among the company's employees for purposes of coverage under Section 2(12) of the Employees' State Insurance Corporation Act, 1948. The lower courts held that the MD was not an "employee" within the meaning of Section 2(9) and therefore the company, having only 19 other workers, was not covered. The Supreme Court examined the statutory definition of "employee" and the conditions it entails, concluding that Dhanwate was employed for wages, his duties were connected with the factory administration, and his remuneration fell within the prescribed wage ceiling. The Court also rejected the view that a Managing Director could be deemed a principal employer, emphasizing that ultimate control rested with the Board of Directors, not the individual MD. Relying on earlier decisions, the Court held that a Managing Director can have a dual capacity as both director and employee. Consequently, the MD was added to the employee count, making the establishment covered under the Act. The appeal was allowed, setting aside the decisions of the High Court and the ESIC Court.

Issues considered

The meaning of "employee" under Section 2(9) of the Employees' State Insurance Corporation Act, 1948 as applied to a Managing Director of a private limited company.
Whether a Managing Director can simultaneously be a principal employer under Section 2(17) and an employee under Section 2(9).
Whether the remuneration paid to the Managing Director qualifies as "wages" within the meaning of Section 2(22).
The applicability of Section 2(12) requiring a minimum of twenty employees for factory coverage.

Legislation cited

Employees' State Insurance Corporation Act, 1948s. 2(12), s. 2(17), s. 2(22), s. 2(9), s. 75, s. 76
Factories Act, 1948s. 2(15), s. 2(4)

Subjects

Employees' State Insurance Corporation Actdefinition of employeeManaging Directorprincipal employerdual capacityfactory coveragelabour law

Judgment

EMPLOYEES STATE INSURANCE CORPORATION A
v.
MIS. APEX ENGINEERING PVT. LTD.

NOVEMBER 6, 1997

[S.B. MAJMUDAR AND M. JAGANNADHA RAO, JJ.] B

Labour Laws :

Employees' State Insurance Corporation Act, 1948 :
c
Section 2 sub-sections (9), (! 2) (! 5), (! 7) and (22)- "'Employee"-
Managing Director of Private Limited Company-Appointed on
remuneration-Engaged in administration work-Wages within the
permissible limit-Corporation treating him as an employee of the company-
Insurance Court and High Court held the Managing Director not an employee
within the meaning of Section 2(9) of the Act-Held, Managing Director was D
an employee of the Company-Not a principal employer-Not to be treated
on par with a partner of a partnership firm-Can have dual capacity as a
Managing Director and also an employee of the Company.

The respondent was a private limited company engaged in the
manufacture of motor seats. The Board of Directors of the respondent- E
Company resolved to elect 'D', one of its Directors, as the Managing Director
of the Company on an annual remuneration of Rs. 12.000 for rendering
services as Managing Director. 'D' as the Managing Director of the Company
was authorised to borrow, invest and lend money. The appellant-Corporation
included 'D' along with other 19 employees engaged for wages for the F
purpose of covering the company as a factory under sub-section (12) of
section 2 of the Employees State Insurance Corporation Act, 1948. 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, while allowing the application, held that 'D' could not be treated as
an "employee" of the company; and as the company had only 19 employees, G
it was not covered by sub-section (12) of section 2 of the Act. The appeal was
dismissed by both the Single Judge and Division Bench of the High Court.
Hence the present appeal.

The contention of the appellant was that the relevant provisions of sub- H
57
58 SUPREME COURT REPORTS [1997] SUPP. 5 S.C.R.
.
A section (9) of Section 2 and sub-section (12) of section 2 of the Act were not
correctly interpreted by the courts below. It was also contended that even
assuming that 'D', the Managing Director, was a principal employer, there
was nothing illegal in treating him simultaneously as an employee if he
...
satisfied all the requirements of section 2(9) of the Act.

B Allowing the appeal, this Court

HELD: I. 'D' the Managing Director, was an employee of the company
and as such could be added to the list of remaining 19 employees so as to
make a total of 20 for covering the establishment under sub-section (12) of
C section 2 of the Employees' State Insurance Corporation Act, 1948. The
High Court erred in taking the view that 'D,' as Managing Director of the
company, was not an employee within the meaning of sub-section (9) of
section 2 of the Act. [62-A-Cj

2.1. Before a person can be said to be an employee the following
D characteristics must exist qua his service conditions :-

(i) He should be em ployed for wages. This would pre-suppose
relationship between him as employee on the one hand and the
independent employer on the other;

(ii) Such employment mu~t be in connection with the work of the
E factory or establishment to which the Act applies;

(iii) He must be directly employed by the principal employer on any
work of, or incidental or preliminary to or connected with work of,
the factory or establishment;

F (iv) In the alternative he should be employed by or through an
immediate employer on the premises of factory or establishment or
under supervision of principal employer or his agent;

(v) He should be employed for wages on any work connected with the
administration of the factory or establishment or any part, department
G or branch thereof.

(vi) The wages of the person so employed excluding remuneration for
overtime should not exceed such wages as prescribed by the Central
Government. [64-D-H; 65-A-BJ ·

H 2.2. All the requisite conditions for applicability of the term 'employee'
E.S.l.C. v. APEX ENGINEERING PVT. LTD. 59
as defined by section 2(9) of the Act stood satisfied in the case of' D', the. A
Managing Director. He was entrusted with the work of Managing Director
on remuneration and in view of this remuneration he had to discharge his
extra duties as Managing Director. Thus he was receiving this remuneration
under the contract of employment pursuant to the resolution of Board of
Directors and that remuneration was paid to him because he was carrying B
on his extra duties of Managing Director. Therefore, he was a person employed
for wages and his employer was the comp~ny which is a legal entity by itself.
It could not be said that he was a self-employed person or agent of the
employer which would be the case of a Managing Partner in a partnership
firm which by itself is not a legal entity. 165-F-Hl

2.3. The duties as a Managing Director were entrusted to 'D', in
c
connection with the work of the establishment and for such work which he
would carry out, he would be entitled to the remuneration of the Managing
Director. These extra duties were in connection with the work of the
establishment and not dehors it. These extra duties carried out by 'D' would
not detract from the applicability of the definition of"employee." He could D
· have a dual capacity both as a Managing Director on the one hand and as
an employee of the company on the other. [66-A-C; 73-Fl

Shri Ram Prasad v. Commissioner of Income-tax, New Delhi, AIR
(1973) SC 637, reiied on.
E
Regional Director, Employees' State Insurance Corpn. v. Mis. Margarine
& Refined Oils Co. (P) ltd., Bangalore, (1984) Lab, 1. C. 844; Non-Ferrous
Rolling Mills (P) Ltd. v. The Regional Director, Employees' State Insurance
Corporation Madras, (1977) Lab. J.C. 1706 and Employees' State Insurance
Corporation, Ernaku/am v. Victory Tile Works, (44 Indian Factories Journal
304), approved. F
Lee v. Lee's Air Farming Ltd., (1961) AC 12 and Bou/ting v.
Cinematagraph Associataton Etc., (1963) 1 All ER 716, referred to.

Employees' State Insurance Corporation v. Mis. Ashok Plastic (P)
Ltd., (1988) Lab. I.C. 793, disapproved. G
2.4. By the resolution of the .Board of Directors 'D' was directly
employed and entrusted with the work of M~naging Director. [66-C]

2.5. 'D' has been employed for wages on work connected with the
administration of the establishment as his functions as Managing Director H
60 SUPREME COURT REPORTS [1997] SUPP. 5 S.C.R.

A entitled him to borrow, invest and lend money. 166-D-E]

2.6. The remuneration paid to him for discharging his duties as
Managing Director remained within the permissible limits of wages as
prescribed by the Central Government at the relevant time for applicability
of the definition of the term "employee" as per section 2(9) of the Act.
B ~GI

3. It cannot be assumed by the High Court that 'D' being appointed as
a Managing Director could be said to be principal employer within the
meaning of section 2(17) of the Act as he could be said to be occupier within
C the meaning of section 2(15) of the Act read with section 2(4) of the Factories
Act. Managing Director cannot be said to be the owner of the factory which
belongs to the private limited company as the working of the factory is
controlled by the entire body of Board of Directors. He is not an occupier
of the factory as he does not occupy the factory only by himself. As per the
Articles of Association the ultimate control over his working was with the
D Board of Directors as a whole. 168-D-E; 67-D-F; 68-E]

J.K. Industries Ltd. & Ors. v. Chief Inspector of Factories and Boilers
& Ors., [1996] 6 SCC 665, relied on.

4. The Managing Director of respondent company could not be treated
E on par with partner of a partnership firm being given some remuneration
for his extra work. [71-D]

Regional Director, Employees State Insurance Corporation. Trichur v.
Ramanuja Match Industries, [1985] 2 SCR 119, held inapplicable.

Bacha F. Gujdar v. Commissioner of Income-Tax, Bombay, [1955] 1
F SCR 876, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3411 of 1996.

From the Judgment and Order dated 20.4.87 of the Bombay High Court
in L.P.A. No. 14of1985.
G Yijay K. Mehta for the Appellant.

S. Wasim and A. Qadri, (A.C.) for the Respondent.

The Judgment of the Court was delivered by

H S.B. MAJMUDAR, J. Employees', State Insurance Corporation has
E.S.I.C. v. APEX ENG. PVT. LTD [S.!3. MAJMUDAR, J.] 61
brought in challenge judgment and order rendered by a Division Bench of the A
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 B
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 C
necessary to note the backdrop facts leading to these proceedings.

Background Facts.

Respondent is a private limited company incorporated under the
Companies Act, 1956. It is engaged in the manufacture of mot<ir seats. Its D
factory at the relevant time was located in M.l.D.C. Nagpur. It also had a
branch factory at Nagpur. On or about 09th 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 E
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 F
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 l st 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 G
of the Act. •

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 05th September, 1975 allowed the application of the respondent-company H
62 SUPREME COURT REPORTS [1997] SUPP. 5 S.C.R.

A 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.
B 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
C 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

In support of the appeal the learned counsel for the appellant-Corporation
D 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. That the
Division Bench of the High Court had erred in taking the view that the
Managing Director was principal employer as defined by Section 2 sub-
E section (17) of the Act and as such could not simultaneously be treated as
an employee as per Section 2 sub-section (9) of the Act. It was also submitted
that the High Court had erred in relying upon decision of this Court in the
case of Regional Director Employees State Insurance Corporation Trichur
v. Ramanuja Match Industries, [1985] 2 SCR 1191 which did not apply on the
facts of the present case. On the contrary according to him the controversy
F in the present case had to be decided in the light of judgment of this Court
in the case of Shri Ram Prasad v. Commissioner of Income-tax. New Deihi.
AIR (1973) SC 637. It was also contended that in any view of the matter even
assuming that the Managing Director could be considered to be a principal
employer as defined by Section 2 sub-section (17) of the Act there was
.
G nothing illegal in he being treated simultaneously as an employee if he
satisfied all the requirements of Section 2(9) of the Act. In support of these
contentions learned counsel placed reliance on various decisions of the High
Courts to which we will make a reference at an appropriate stage in this
judgment.

H Learned counsel Shri Qadri, amicus curiae, was good enough at our
E.S.J.C. v. APEX ENG. PVT. LTD [S.B. MAJMUDAR, J.) 63
request to look into the matter and fairly placed for our consideration the A
relevant aspects of the matter centering round correct construction of the
provisions of the Act. He submitted that even if Managing Director could be
considered to be a principal employer it could not be said that he could not
have simultaneously a dual capacity of being an employee on remuneration.
He however placed before us the contrary view taken by the High Court of B
Calcutta in the case of Employees, State Insurance Corporation v. Mis Ashok
Plastic (P) Ltd, (1988) Lab. I. C. 793. He also invited our attention to other
judgments of the High Courts and of this Court which will be referred to by
us hereinafter.

Consideration of Point in Dispute. . c
The controversy in the present case rotates round the interpretation of
the term 'employee' as defined by Section 2 sub-section (9) of the Act. It
reads as under :

"2(9). 'employee' means any person employed for wages in or in D
connection with the work of a factory or establishment to which this
Act applies and-
(i) who is directly employed by the principal employer on any
work of, or incidental or preliminary to or connected with the
work of, the factory or establishment whether such work is E
done by the employee in the factory or establishment or
elsewhere; or
(ii) who is employed by or through an immediate employer on the
premises of the factory or establishment or under the
supervision of the principal employer or his agent on work p
which is ordinarily part of the work of the factory or
establishment or which is preliminary to the work carried on
in or incidental to the purpose of the factory or establishment;
or
(iii) whose services are temporarily lent or let on hire to the G
principal employer by the person with whom the person whose
services are so lent or let on hire has entered into a contract
of service; and includes any person employed for wages on
any work connected with the administration of the factory or
establishment or any part, department or branch thereof or
with the purchase of raw materials for, or the distribution or H
64 SUPREME COURT REPORTS [1997] SUPP. 5 S.C.R.

A sale of the products of, the factory or establishment, or any
person engaged as an apprentice, not being an apprentice
engaged under the Apprentices Act, 1961 or under the
standing orders of the establishment; but does not include-

(a) any member of the Indian naval, military or air forces; or
B
(b) any person so employed whose wages (excluding remuneration
for overtime work) exceed such wages as may be prescribed
by the Central Government.

Provided that an employee whose wages (excluding remuneration
c . for overtime work) exceed such wages as may be prescribed by the
Central Government at any time after (and not before) the beginning
;

of the contribution period, shall continue to be an employee until· the
end of that period;"

A mere look at the aforesaid provision shows that before .a person can be said
D to be an employee the following characteristics must exist qua his service
conditions :

(1) He should be employed for wages. This would pre-suppose
relationship between him as employee on the one hand and
the independent employer on the other;
E (2) Such employment must be in connection with the work of the
factory or establishment to which the Act applies;
(3) He must be directly employed by the principal employer.on
· any work of, or incidental or preliminary to or connected with
work of, the factory or establishment;
F
(4) In the alternative he should be employed by or through an
immediate employer on the premises of factory or
establishment or under supervision of principal employer or
his agent;
(5) We are not concerned with clause (3) of the said definition.
G
But the inclusive part of definition being relevant has to be
noted as Condition No. s: He should be employed for wages
on any work connected with the administration of the factory
or establishment or any part, department or branch thereof.
We are also not concerned with the exempted categories of
H persons in the present case and hence we need not dilate on
E.S.I.C. v. APEX ENG. PVT. LTD [S.B. MAJMUDAR, J.] 65
the same. A
(6) This is subject to the further condition that the wages of the
person so employed excluding remuneration for overtime
should not exceed such wages as prescribed by the Central
Government.
The definition of 'wages' is provided in Section 2 sub-section (22) of the Act. B
It reads as under :

"2(22). 'wages' means all remuneration paid or payable, in cash to an
employee, if the terms of the contract of employment, express or
implied, were fulfilled and includes any payment to an employee in
respect of any period of authorised leave, lock-out, strike which is not c
illegal or lay-off and other additional remuneration, if any paid at
intervals not exceeding two months, but does not include-

(a) any contribution paid by the employer to any pension fund
or provident fund, or under this Act;
D
(b) any travelling allowance or the value of any travelling
concession;
(c) any sum paid to the person employed to __ defray special
expenses entailed on him by the nature of his employment;
or E
(d) any gratuity payable on discharge;"
A conjoint reading of the aforesaid provisions of the Act clearly indicates
that Shri Dhanwate who was one of the directors of the company was
entrusted with the work of Managing Director on remuneration of Rs. 12,000
per year, that is, Rs. 1000 per month and in view of this remuneration he had F
to discharge his extra duties as Managing Director even apart from his
functions as an ordinary director. Thus it could not be gainsaid that he was
receiving this remuneration under the contract of employment pursuant to the
. resolution of the Board of Directors and that remuneration was paid to him
because he was carrying on his extra duties as Managing Director. So far as G
the first condition is concerned it must, therefore, be held that he was a
person employed for wages and his employer was the company which ·is a
legal entity by itself. It could not, therefore, be said that he was a self
employed person or agent of the employer which would be the case of a
managing partner in a partnership firm which by itself is not a legal entity. The
first condition is, therefore, clearly satisfied in the present case. So far as the H
66 SUPREME COURT REPORTS (1997) SUPP. 5 S.C.R.

A second condition is concerned it also cannot be denied that the duties as a
Managing Director were entrusted to him in connection with the work of the
establishment and for such work which he would carry out he would be
entitled to the remuneration of the Managing Director. The High Court has
placed strong reliance on the Articles of Association which stated the extra
B duties of Managing Director. But those extra duties were in connection with
the work of the establishment and not dehors it and it was for these extra
duties that he was to be paid the remuneration which otherwise would not
have been pai~ to him ifhe had remained an ordinary director. Consequently
the emphasis put by the High Court on these extra duties to be carried out
by the Managing Director would not detract from the applicability of the
C second condition of the definition of 'employee'. So far as the third condition
is concerned, by the resolution of the. Board of Directors he was directly
employed and entrusted with the work of Managing Director. The said
condition is also, therefore, satisfied. The alternative condition no. 4 would
not obviously apply. on the facts of the present case as it is not the case of
the respondent-company that Shri Dhanwate was employed through any
D immediate employer other than the principal employer. So far as condition no.
5 is concerned Shri Dhanwate can be said to have been employed for wages
on any work connected with the administration of the establishment as his
functions as Managing Director entitled him, as noted by the High Court, to
borrow money not exceeding Rs. I 0,00,000 at any time with or without security
E as he deemed fit. He was also authorised to invest a sum not exceeding Rs.
I0,00,000 in aggregate in either movable or immovable assets as may be
necessary. He was further empowered to lend a sum not exceeding Rs. IOOO
without any security. These all were funds of the company which could be
invested by him and even the power to borrow money was also for the
purpose. of the company. All these activities were connected with the
F administration of the factory. The fifth condition was also, therefore, satisfied
by him. So far as the last condition is concerned it is also not in dispute
between the parties that remuneration of Rs. 12,000 per year or Rs. I 000 per
month as paid to him for discharging his duties as Managing Director remained
within the permissible limits of wages as prescrilied by the Central Government
G at the relevant time for applicability of the definition of the term 'employee'
as per Section 2 sub-section (9) of the Act. Thus all the requisite conditions
for applicability of the term 'employee' as defined by the Act stood satisfied
in the case of Shri Dhanwate.

However the Divisior. Bench of the High Court in the impugned judgment
H has placed emphasis on the fact that because Shri Dhanwate was appointed
.
E.S.I.C. v. APEX ENG. PVT. LTD [S.B. MAJMUDAR, J.] 67
as a Managing Director with wide powers as aforesaid he could be said to A
be principal employer. 'Principal employer' is defined by Section 2 sub-section
(17) of the Act as under :

"2( 17). 'principal employer' means -

(i) in a factory, the owner or occupier of the factory, and includes B
the managing agent of such owner or occupier, the legal
representative of a deceased owner or occupier, and where a
person has been named as the manager of the factory under
the Factories Act, 1948, the person so named;"
(ii) in any establishment under the control of any department of C
any Government in India, the authority appointed by such
Government in this behalf or where no authority is so appointed
the head of the department;
(iii) in any other establishment, any person responsible for the
supervision and control of the establishment; D
The above provision would apply in a case where the Managing Director is
found to be the owner or occupier of the factory. Now it is obvious that
Managing Director by himself cannot be said to be the owner of the factory
which belongs to the private limited company, namely, the respondent herein
and the working of the factory is controlled by the entire body of Board of E
Directors. But the Managing Directory though being one of the directors
cannot be said to be the sole owner of the factory. Nor can he be said to be
an occupier of the factory as he does not occupy the factory only by himself.
It is also not the case of the respondent that Shri Dhanwate had been named
an occupier of the factory under the Factories Act, 1948. So far as the tenm
'occupier' of the factory is concerned it is defined by Section 2 sub-section F
(15) of the Act to have the meaning assigned to it in the Factories Act, 1948.
Dealing with the definition of the said term as found in Section 7(1) of the
Factories Act Dr. A.S. Anand, J., speaking on behalf of a Bench of two
learned Judges of this Court in the case of J.K. Industries Ltd. & Ors. v. Chief
Inspector of Factories and Boilers & Ors., [1996] 6 sec 665 held that to be G
tenmed as an occupier of the factory within the meaning of Section 2(n) of
the Factories Act the person concerned must have ultimate control over the
affairs of the factory. Dealing with the question as to who can be said to be
having ultimate control over the affairs of the factory owned by a company
the following pertinent observations were made in para 21 of the Report as
under: H
68 SUPREME COURT REPORTS [1997] SUPP. 5 S.C.R.
•
A "There is a vast difference between a person having the ultimate
control of the affairs of a factory and the one who has immediate or
day-to-day control over the affairs of the factory. In the case of a
company, the ultimate control of the factory, where th~ company is the
owner of the factory, always vests in the company, through its ·Board
of Directors. The Manager or any other employee, of whatever status,
B can be nominated by the Board of Directors of the owner company
to have immediate or day-to-day or even supervisory control over the
affairs of the factory. Even where the resolution of the Board of
Directors says that an officer or employee, other than one of the
directors, shall have the 'ultimate' control over the affairs of the
C factory, it would only be a camouflage or an artful circumvention
because the ultimate control cannot be transferred from that of the
company, to one of its employees or officers, except where there is a
complete transfer of the control of the affairs of the factory."

It cannot, therefore, be said as assumed by the High Court in the impugned
D judgment that Shri Dhanwate being appointed as a Managing Director could
be said to be principal employer within the meaning of Section 2 sub-section
( 17) of the Act as he could be said to be occupier within the meaning of
Section 2(15) of the Act read with Section 2(n) of the Factories Act. As per
the Articles of Association the ultimate control over his working was with the
E Board of Directors as a whole as the High Court has noted that Shri Dhanwate
was allowed to exercise all the powers exercisable by a director under the
supervision and control of the Board of Directors.

But even assuming that the High Court was right that Shri Dhanwate
could be said to be principal employer there is nothing in the Act to indicate
that a Managing Director being the principal employer cannot also be an
F employee. In other words he can have dual capacity. So far as this aspect of
the matter is concerned we can profitably refer to a decision of a Bench of
three learned Judges of this Court in the case of Shri Ram Prasad, (supra).
In that case this Court was concerned with the question whether the Managing
Director of a company can be said to be a servant of the company whose
G remuneration could be treated to be salary assessable to income tax. The
relevant observations of this Court speaking through Jaganmohan Reddy, J.,
as found in paragraphs 6 and 7 of the Report read•as under :

"Generally it may be possible to say that the greater the amount of
direct control over the person employed, the stronger the conclusion
H in favour of his being a servant. Similarly the greater the degree of
E.S.l.C. v. APEX ENG. PVT. LTD [S.13. MA.IMUDAR, .I.] 69
independence the greater the possibility of the services rendered A
being in the nature of principal and agent. It is not possible to lay
down any precise rule of law to distinguish one kind of employment
from the other. The nature of the particular business and the nature
of the .Wties of the employee will require to be considered in each
case i.n order to arrive at a conclusion as to whether the person B
employed is a servant or an agent. Though an agent as such is not
a servant, a servant is generally for some purposes his master's
implied agent, the extent of the agency depending upon the duties or
position of the servant. It is again true that a director of a company
is not a servant but an agent inasmuch as the company cannot act
in its own person but has only to act through directors who qua the C
company have the relationship of an agent to its principal. A Managing
Director may have a dual capacity. He may both be a Director as well
as employee, depending upon the nature of his work and the terms
of his employment. Whether or not a Managing Director is a servant
of the company apart from his being a Director can only be determined
by the articles of association and the terms of his employment." D
In paragraph 13 of the Report relying on the Articles of Association and terms
and conditions of the agreement appointing the assessee as Managing Director
the following pertinent observations were made :

"Where the articles of association and terms and conditions of the E
agreement definitely indicate that the assessee was appointed to
manage the business of the Company in terms of the articles of
association and within the powers prescribed therein and under the
terms of the agreement he tan be removed for not discharging the
work diligently or if he is found not to be acting in the interest of the F
Company as Managing Director, then it can hardly be said that he is
an agent of the Company and not a servant.

The control which the company exercises over the assessee need
not necessarily be one which tells him what to do from day to day.
Nor does supervision imply that it should be a continuous exercise G
of the power to oversee or superintend the work to be done. The
control and supervision is exercised and is exercisable in terms of the
articles of association by the Board of Directors and the company in
its general meeting. The fact that power which is given to the Managing
Director emanates from the articles of association which prescribes
the limits of the exercise cf that power and that the powers of the H
70 SUPREME COURT REPORTS [1997) SUPP. S S.C.R.

A assessee have to be exercised within the terms and limitations
prescribed thereunder and subject to the control and supervision of
the Directors is indicative of his being employed as a servant of the
company. Hence remuneration payable to the assessee would be
salary."

B We have already seen the powers and duties of Managing Director as entrusted
to Shri Dhanwate as per the Articles of Association. They clearly indicate that
he had to work under the control and supervision of the Board of Directors
and to discharge his functions to earn his remuneration of Rs. I 000 per month
by working as Managing Director and by discharging extra duties as entrusted
C to him.
The aforesaid decision of this Court clearly rules that the Managing
Director while acting as such can have dual .capacity both as Managing
Director on the one hand and as servant or employee of the company on the
other. The Division Bench in the impugned judgment with respect was in error
D in bypassing the ratio of the aforesaid decision of this Court by observing
that it was a judgment rendered under the Income Tax Act and, therefore, it
had no bearing on the scheme of the present Act. We also find that the
Division Bench was equally in error when it placed reliance for its decision
on the judgment of this Court in the case of Regional Director Employees
State Insurance Corporation Trichur v. Ramanuja Match Industries, (supra).
E In the said decision a Bench of two learned Judges of this Court held that
a partner of a firm receiving salary is not an employee within the meaning of
Section 2 sub-section (9) of the Act. Ranganath Misra, J. (as he then was),
speaking for this Court held that the partners cannot be held emplo:rees of
the partnership finn. A partnership finn is not a legal entity and in a partnership'
F finn each partner acts as an agent of the other. The position of a partner qua
the firm is thus not that of a master and a servant or employer and employee
which concept involved an element of subordination and not that of equality.
The partnership business belongs to the partners and each one of them is
an owner thereof. In common parlance the status of a partner qua the firm is
thus different from employees working under the finn. It may be that a partner
G is being paid some remuneration for any special attention which he devotes
but that would not involve any change of status and bring him within the
definition of employee.

We fail to appr.eciate how these observations can ever be pressed in
service on the facts of the present case. Respondent-company is not a
H partnership finn. It is a separate legal entity. It has chosen one of its directors
E.S.I.C. v. APEX ENG. PVT. LTD [S.B. MAJMUDAR, J.) 71
to act as Managing director on payment of remuneration for the extra work A
to be done by him as such. He has to discharge his functions as Managing
Director under the supervision of the entire Board of Directors. Thus there
is employer-employee relationship between two separate entities. On the one
hand is the Managing Director employed as such and on the other the
respondent-company being a separate legal entity which employs him. In this B
connection we may also usefully refer to a decision of this Court in the case
of Bacha F. Guzdar v. Commissioner of Income-Tax, Bombay, [1955] I SCR
876. A Constitution Bench of this Court speaking through Ghulam Hasan, J.,
brought out the clear legal distinction between a firm and a company by
observing that the position of a shareholder of a company is altogether
different from that of a partner of a firm. A company is a juristic entity distinct C
from the shareholders but a firm is a collective name or an alias for all the
partners. Of course the decision was rendered in the light of Income-tax Act
wherein the question was whether agricultural income would include the
dividend paid to a shareholder of a company.

It must, therefore, be held that the Managing Director of respondent- D
company could not be treated on par with partner of a partnership firm being
given some remuneration for his extra work. The decision of this Court in
Ramanuja Match Industries (supra) was, therefore, clearly inapplicable to the
facts of the present case and was erroneously pressed in service by the
Division Bench of the High Court in the impugned judgment in deciding the E
appeal of the appellant-Corporation.

Now is the time for us to refer to decisions of other High Courts and
this Court to which our attention was invited by the learned counsel for the
parties appearing before us.

A Division Bench of the Karnataka High Court in the case of Regional F
Director. Employees State Insurance Corpn. v. Mis Margarine & Refined
Oils Co. (P) Ltd., Bangalore 1984 Lab. J.C. 844 took the view which has
commanded to us in the present proceedings. It was held by the High Court
that the Managing Director of a private limited company was an employee as
defined by Section 2 sub-section (9) of the Act. In this connection it was G
observed by the High Court that a company is a legal person and a corporate
entity and as such it can employ one of its directors as Managing Director.
The Managing Director of the Company covered by the Act becomes an
employee of the company within the meaning of Section 2(9) of the Act and
the remuneration paid to him for the functions he discharges as Managing
Director would amount to wages as defined under Section 2(22) of the Act H
72 SUPREME COURT REPORTS [1997] SUPP. 5 S.C.R.

A for the purpose of calculating employees contribution. The aforesaid decision
of the High Court correctly interprets the relevant provisions of the Act.

In the case of Non-Ferrous Rolling Mills (P) Ltd. v._ The Regional
Director, Employees' State Insurance Corporation, Madras, 1977 Lab. J.C.
1706 a learned Single Judge of the High Court of Madras held that a director
B of a private limited company appointed on remuneration to be the Managing
Director of the factory, could still be said to be an employee of the company
as he was getting wages within the meaning of Section 2 sub-section (22) of
the Act. It was also held that even if the director of the company was
entrusted with the work of managing the factory and thus could be treated
C to be principal employer as defined by Section 2 sub-section (17) of the Act,
he could still be treated as an employee of the company within the meaning
of Section 2(9) of the Act as he satisfied all the relevant conditions of the
said definition. For coming to that conclusion reliance was placed on a
decision of the Privy Council in the case of lee v. Lee's Air Farming ltd.,
(1961) AC 12 and also on a majority decision of the Court of Appeal in
D England in the case of Bou/ting v. Cinematograph Association Etc., (1963)
1 All ER 716.

In the Privy Council case one Lee who was the governing director of
a private limited company which was formed for the purpose of carrying on
the business of serial top-dressing, was also a qualified pilot manning the
E company's aircraft. While piloting one of the company's aeroplanes, Lee was
killed. His widow claimed compensation for his death under the New Zealand
workers Compensation Act. 1922 against the company. The Privy Council had
to examine the question whether Lee even though being a governing director
of the company could still be treated as a worker of the company when he
was flying the company's aircraft as pilot on remuneration. The Judicial
F Committee of the Privy Council observed that company was a different entity
from Lee. Although Lee was the governing director of the company, he was
nonetheless a worker under the company while flying its aircraft for wages.
On the moot question posed for their consideration the Privy Council laid .,.
down the legal position in the following terms :
G
"Ex facie there was a contract of service. Their Lordships conclude,
therefore, that the real issue in the case is whether the position of the
deceased as sole governing director made it impossible for him to be
the servant of the respondent company in the capacity of chief pilot
of that company. In their Lordships' view, for the reasons which have
H been indicated, there was no such impossibility. The respondent
E.S.J.C. v. APEX ENG. PVT. LTD [S.B. MAJMUDAR, .I.] 73
company and the deceased were separate legal entities, Their Lordships A
consider, therefore, that the deceased was a worker.

In this connection we may also usefully refer to the decision of the
Court of Appeal in the case of Bou/ting v. Cinematograph Association Etc.,
(supra). In that case the Court of Appeal had to decide the question whether
two brothers who bore the name of Boulting and who were the managing B
directors of a film company called the Charter Film production Co. Ltd. could
be regarded as employees of the company, because they also did work for
the same company on the technical side of film production as film directors,
film producers, film editors and film script writ~rs. The question arose out of
a controversy with a trade union of workers of the film industry in Britain. C
Eligibility for membership of this trade union was governed by R. 7 of the
Articles of Association. This rule provided that the association shall consist
of all employees engaged on the technical side of film production, including
film directors, script writers etc. The Court of appeal, by a majority, held that
the two managing directors were employees within the meaning of the rule
above quoted nonetheless they being managing directors of the employer D
company. Jn this connection the observations of Upjohn, L.J. constituting the
majority of the Court of Appeal deserve to be noted as under :

"I cannot myself escape from the conclusion that the position of the
Boulting Brothers, although anomalous perhaps, is strictly within the
wording of R. 7, for they are in fact employees of Charter engaged on E
the technical side of film production. True it is that as directors, they
are not employees, but it cannot, I think, be doubted that a managing
director may for many purposes properly be regarded as employee."

The decision of the Madras High Court following the aforesaid decisions lays
down the correct legal position. Thus even assuming that Shri Dhanwate was F
a principal employer even then in the light of the aforesaid discussion it has
to be held that he could have a dual capacity both as a Managing Director
on the one hand and as an employee of the company on the other.

We may at this stage refer to two decisions to which our attention was G
invited by learned amicus curiae counsel. A Division Bench of the High
Court of Kera la in the case of Employees' State Insurance Corporation
Ernakulam v. Vict01y Tile Works, [44 Indian Factories Journal 304] had to
consider whether a person who satisfies the definition of 'principal employer'
under Section 2(17) of the Act could simultaneously satisfy the requirements
of the definition of the term 'employee' under Section 2(9) of the Act. H
74 SUPREME COURT REPORTS [1997] SUPP. 5 S.C.R.

A Subramanian Poti, J. (as he then was), speaking for the Court observed that
Employees' State Insurance Act. 1948 is intended to cover all wage-earners
whether they are managers, supervisors, clerks, workmen or any other class
of employees provided they fall within the definition of 'employee' under
Section 2(9) of the Act. It is clear from the scheme of the Act that there is
no apparent conflict of interest between the principal employer and the
B employee and there is no reason why if a person falls within the definition
of 'principal employer' he cannot in certain cases be also an 'employee'. In
our view, the aforesaid decision squarely falls in line with the scheme of the
Act and the decision of other High Court on the point to which we have made
a reference earlier.
c Now is the time for us to consider the dissenting voice of Calcutta High
Court emanating from its decision in the case of Mis Ashok Plastic (P) ltd
(supra). In that case a director of the company who was paid for some
remuneration was held not to satisfy the requirements of Section 2 (9) of the
Act. Now it must be noted that the Calcutta High Court in that case was
D considering an entirely different fact situation. Being a director of the company
some remuneration was paid to him in connectiori with his specialised activities.
It was found as a fact that he was not employed on remuneration on a regular
basis. This distinctive feature itself would rule out the applicability of the said
decision to the facts of the present case. However certain observation~ were
E made by Sukumar Chakravarty, J. speaking for the Division Bench of the
Calcutta High Court in that case in paragraph 27 of the Report to the following
effect :

"It is true that 'wages' as defined in S. 2(22) of the Act means "all
remuneration paid or payable in cash to an employee, if the tenns of
the contract of employment express or implied were fulfilled and
F
includes .... ". For taking the character of 'wages' as defined in the
above Section, 'remuneration' must be paid or payable in cash to an
employee. All remuneration will not take the character of 'wages'
within the meaning of S.2(22) of the Act. The special allowance of Rs. •.,
300 or Rs. 500 as the case may be, which is being paid to the Director,
G Shri Gupta under the description of remuneration in the instant case
is therefore not the 'wages' within the meaning ofS. 2(22) of the Act."

The aforesaid observations, in our view, are not borne out from the express.
language of section 2 sub-section (22) of the Act which defines 'wages' to
include any type of remuneration paid or payable to an employee. If a person
H satisfies the definition of the term 'employee' as found in Section 2 sub-
E.S.J.C. v. APEX ENG. PVT. LTD [S.B. MAJMUDAR, J.] 75
section (9) of the Act and is paid remuneration for discharging the extra work A
assigned to him for earning such remuneration it cannot be said that it would
not be 'wages' as wrongly assumed by the High Court in the aforesaid
decision in paragraph 24 of the Report.

As a result of the aforesaid discussion it must be held that the Division
Bench of the High Court in the impugned judgment had erred in taking that B
view, on the facts of the present case, that Shri Dhanwate as Managing
Director of the company was not an employee within the meaning of section
2 sub-section (9) of the Act. On the other hand it must be held that he was
an employee of the company and as such could be added to the list of
remaining 19 employees so as to make a total of 20 for covering the C
establishment under Section 2 sub-section (12) of the Act which defines
'factory' to mean, any premises including the precincts there of - (a) ....... ; or
(b) whereon twenty or more persons are employed or were employed for
wages on any day of the preceding twelve months, and in any part of which
a manufacturing process is being carried on without the aid of power or is
ordinarily so carried on'. D
Before parting with this case we must put on record our high sense of
appreciation for the assistance rendered by the amicus curiae advocate Shri
Qadri at our request.

In the result this appeal is allowed. The judgment and order of the E
Division Bench of the High Court in Letters Patent Appeal No. 14 of 1985 are
set aside. Similarly the judgment of the learned Single judge of the High Court
as well as that of the ES! Court in E.S.I Case No. 2of1974 are also set aside
and the ES! Case No. 2 of 1974 filed by the respondent-company is ordered
to be dismissed. Ordered accordingly. No Costs.
F
S.V.K.I. Appeal allowed.