Holding

An employer’s liability to pay ESI contributions continues until the date of closure and may be recovered even after the establishment has closed.

Summary

The Employees' State Insurance Corporation (ESIC) assessed contribution from Hotel Kalpaka International for the period 11 July 1985 to 31 March 1988 under section 45‑A of the Employees' State Insurance Act, 1948. The hotel, which employed more than 20 workers and was covered by the Act, closed its business on 31 March 1988. ESIC issued notices and, after receiving no response, filed a recovery claim with the District Collector. The hotel challenged the recovery before the ESI Court, which upheld the assessment but held that recovery could not be pursued after closure, limiting the remedy to prosecution under section 85. The Kerala High Court affirmed this view and dismissed ESIC's appeal. The Supreme Court allowed the appeal, holding that the employer’s liability to pay contributions arises from the commencement of the establishment and continues until its closure, and that recovery proceedings may be instituted even after the business has shut down. Consequently, ESIC was entitled to recover the assessed contribution with interest.

Issues considered

Whether the Employees' State Insurance Corporation can enforce recovery of contributions under section 45‑A after the establishment has closed.
Whether the employer's liability for both employer and employee contributions continues until the date of closure and is enforceable post‑closure.
Whether a notice issued after the closure defeats the corporation's right to recover contributions.
Whether the employer can avoid liability by contending that it never employed 20 or more workers.

Legislation cited

Employees' State Insurance Act, 1948s. 1(4), s. 26, s. 28, s. 38, s. 40, s. 45-A, s. 75, s. 85

Subjects

Employees' State InsuranceContribution liabilityClosure of establishmentRecovery proceedingsStatutory liabilityEmployer liabilitySocial security legislation

Judgment

,,--,( EMPWYEES STATE INSURANCE CORPORATION A
v.
HOTEL KALPAKA INTERNATIONAL

JANUARY 15, 1993

(P.B. SAWANT ANDS. MOHAN, JJ.) B

_of
Employees State Insurance Ac4 1948:

Sections 1(4), 26, 28, 38, 40 and 45-A-Contribution under the
Act-Liability of Employei-Closure of establishmenHiability prior to
closure-Commencement of recovery proceedings after closure-Validity of.
c
The Respondent-Hotd which was also running a Bar for sometime,
-~ closed down its business after several years. The Inspectors or the appel·
!ant-Corporation verified the records or the establishment and reported
that at certain. point of time the employment strength or the establishment D
includi!ll! the bar was more than 19. Therefore, the establishment was
treated as covered provisionally under the Employees State Insurance
(ESI) Act, 1948. Since the ftoal date of coverage could be decided only
after verifying all the records, the Respondent was asked to produce them•
.~ The Responeot did not avail the opportunity afforded to It. Though the
E
Respondent sent its explanation, it was not acceptable to the appellant-
Corporation and so it passed a detailed order under S.45-A calling upon
the Respondent to pay the contribution with interest at 6% failing which
it would be recovered as arrears of land revenue. Since this order and the
reminder thereto, did not evoke any response from the Respondent, the
appellant sent a claim in Form-19 to the District Collector requesting him F
. ....._,
,
to recover the said amount.

The Respondent challenged the proceedings by riling an application
under S.75 of the Act before the ESI Court, which upheld the assessment
made by the appdlant-Corporation, but stated that recovery steps were
not justified after the closure of the establishment, and only prosecution
G
____..._ as contemplated u/s. 85 of the Act was attracted.

The appellant-Corporation preferred an appeal against the said
decision or ESI Court. The High Court dismissed the appeal and held that
since the ·scheme was made after the closure of the establisment, the H
219
220 SUJ1REME COURT REPORTS (1993] 1 S.C.R.

A appellant was nol Justified iii pl"ucttding against the Respondent.
Being aggrieved by the judgment of the High Court, the appellant·
Corporation preferred the present appeal contending that so long as the
establishment was covered by the provisions of the Act, the Respondent
h
..
could not circumvent·its liability by claiming that before actual recovery
B proceedings, it had closed down the establishment. ~

Allowing the appeal, this Court, )<._

HELD : 1.1. Admittedly the hotel industry like that of the respondent
c has been. notified by the Government thus extending the provisions of the
Employees State Insurance Act to hotel industry. Therefore, on the date of
commencement of its business, namely, 11.7.85, there was a liability on the
Respondent to contribute to the ESI fund. Under section 40 the primary
liability is on the employer to pay, not only his contribution but also the
employees contribution. As such the employer cannot plead that since he bad ~.
D not deducted the employees' contribution from their wages, he could not be
made liable for the same. After all when he makes employees' contribution he
is entitled to deduct from the wages. Thus by force of the application of the
statutory provisions, the liablity to contribute during the relevant period,
namely, ll.7.85to31.3.88,arose. [226E·G]

E 1.2. The Insurance Court as well as the High Court have correctly
upheld the demand for contribution. But it is rather strange to conclude
that the demand could not be enforced against a closed business. If this
finding were.to be accepted it would not promote the scheme and avoid the
mischief. On the contrary, it would perpetrate the mischief. Any employer
F can easily avoid his statutory liability and deny the beneficial piece of
social security legislation to the employees, by closing down the business
before recovery. That certainly is not the indentment of the Act. It is
equally fallacious to conclude that because the employees had gone away
there is no liability to 'contribute. It has to be carefully remembered that
the liability to contribute arose from the date of commencement of the
G establishment and is a continuing liability till the closure. The very object
of establishing a common fund under section 26 for the benefit of all the
employees will again be thwarted if such a construction is put. [227D-F] ~

R.M. Lakshmanamurthy v. The Employees' State Insurance Corpora-
H tion, Bangalore, (1974] 4 SCC 365, relied on.
E.S.I.C. v. HOTEL KALPAKA [MOHAN, J.] 221

2. The proceedmg for the recovery is in respect of the dues of contribu- A
-! lion which arose prior to the closure on 31.3.88. Therefore, it matters little
•-';I'" when notice was issued calling upon the establishment to pay the contribu-
lion. Such a notice is only a reminder to the employer to discharge his
statutory obligation. The appellant-corporation is thus entitled to proceed
with the recovery proceedings in accordance with law. [227H,228A]
B
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1854 of
1992.

From the Judgment and Order dated 18.12.1990 of the Kerala High
Court in M.F.A. No. 800 of 1990.
c
M.L. Verma, V.J. Francis, V. Subramanian and Padmakumar for the
Appellant.

-~-"-- P.S. Poli and R. Sasiprabhu for the Respondent.

The Judgment of the Court was delivered by D

MOHAN, J. This appeal by special leave is directed against i.e.
judgment of the High Court of Kerala in M.FA. No. 800/90 dated 18.12.90.
The short facts leading to this appeal are as under:

The respondent-Hotel is situated in Kaloor, Cochin 17. It is a com-
E
mercial establishment. In July, 1985 this establishment obtained a Bar
licence whereupon a Bar was started. After running the business for some
time it was closed down with effect from 31.3.88.

The Insurance Inspectors of the appellant verified the records of the F
~' respondent-establishment on 29.9.87, 9.10.87 and 19.10 87. It was reported
that the employment strength of the respondent-establishment including
Chembaka Restaurant and Mayuri Bar was more than 19 as on 17.7.85.
Therefore, it was treated as covered under the Employees' State Insurance
Act, 1948 (hereinafter referred to as the Act) with effect from 11.7.85
provisionally. The fact of coverage was intimated to the respondent by G
notice dated 21.3.88. Since the final date of coverage could be decided only
,,."- after verifying all the records pertaining to the date of functioning of the
establishment, the respondent was requested to produce ~II the records
such as attendance register, wage register, ledgers etc. from the date of
starting of the establishment. The respondent was also called upon to start H

----
222 SUPREME COURT REPORTS (1993) 1 S.C.R.

A compliance under the Act with effect from 11.7.85. But there was no --~
compliance. Hence, a notice was issued in Form C-18 dated 26.3.88 along
with a draft order for contribution amount of Rs. 49,399.75 which was
assessed under section 45-A of the Act for the period 11.7.85 to 31.3.88.
Though the respondent was afforded an opportunity to appear before the
B officer, it was not availed of. However, a letter dated 13.7.88 was received
but the explanations were not acceptable to the appellant. Subsequently, a
detailed order dated 3.8.88 under section 45-A of the Act was passed
calling upon the respondent to pay a contribution of Rs. 49,399.75 together
with interest at 6 per cent, failing which it would be covered as an arrear
of land revenue. Again, reminder was sent on 22.9.88. No reply was
C received. Hence, in order to recover the contribution under section 45-A
of the Act, a claim in Form-19 was sent to the District Collector, Er-
nakulam on 31.10.88 requesting to recover the contribution for the period
from 11.7.85 to 31.3.88.

Challenging these proceedings the respondent filed an application
D under section 75 of the Act before the Employees' Insurance Court,
Alleppey. Inter alia it was contended that the applicant (respondent in this
appeal) at no time employed 20 or more persons during the relevant time.
The order was illegal because under section 45-A of the Act the respon-
dent was entitled to a reasonable opportunity of being heard. That was not
E afforded.

These contentions were refuted by the appellant. It was incorrect to
state that on no occasion the respondent employed 20 or more workmen
since the inspection report dated 8.12.86 clearly established to the contrary.

F · The contention that no opportunity had been afforded before initiat-
ing the revenue recovery proceedings, was also denied in view of.Form
C-18 dated 23.6.88, show cause notice dated 3.8.88 and reminder dated
22.9.88.

G By its order dated 6th June, 1990 the Employees' Insurance Court,
Alleppey came to the following conclusion:

"In the result, I can only uphold the assessment made by the
ESI Corporation. But when the question of reciivery is con-
sidered, certain _other aspects cannot be ignored. The adboc
H assessment itself was made by the opposite party after the
E.S.l.C. v. HOTEL KAI.PAY.A [MOHAN, J.] 223

.
, closure of the entire establishn.ent. All the employees working A
in the establishment had left <•Y that time after accepting the
termination of their services. In respect of those employees who
had already left, the ES! Corporation is now trying to recover
contribution. Now the position emerges is that despite the
collection of contribution it will be impossible to bring under
coverage those employees, because, they are not at all available
B
for coverage and for enjoying the benefits under the scheme.
/
Therefore, even if the proceedings initiated earlier were sus-
'
tainable, so long as the employees are not available for the
purpose of coverage, there is no meaning in collecting contribu-
tion alone. In these circumstances, I can only hold that the c
applicant had failed to comply with provisions of the ES! Act
at the appropriate time. Therefore, according to me, after the
closing of the establishment such recovery steps are not justified
but only the prosecution as contemplated under sec. 85 of the
ES! Act is attracted. Therefore, it is upto the ES! Corporation
D
to decide whether any prosecution should be launched against
the applicant for the contravention or non-compliance of the
requirements of the ES! Act and Rules.'

, Aggrieved by the same the appellant-Corporation preferred an ap-

"' peal in M.F.A. No. 800 of 1990. A Division Bench of the Kerala High Court E
by its order dated 18th December, 1990 posed the question for determina-
tion as to whether the appellant cquld proceed against respondent for
re'alisation of contribution under the ES! scheme, after the closure of
establishment.
F
The High Court upheld the finding of Insurance Court that the
respondent had failed to comply with the provisions of the Act at the
' appropriate time. However, it proceeded to hold that the respondent-es-
tablishment was closed on 31.3.88. Ext. P3 notice calling upon the respon-
dent to pay the contribution was only on 23.6.88. Since the scheme was
made after the closure of the establishment, the appellant was not justified G
in proceeding against the respondent. Jn this view, it dismissed the appeal.
It is under these circumstances, the ES! Corporation has come up by way
of special leave to appeal.

Mr, M.L. Verma, learned senior counsel for the appellant urges the H
224 SUPREME COURT REPORTS (1993] 1 S.C.R.

A following :

1. The closure of the respondent-establishment was on 31.3.88 but
the liability with reference to contribution arose earlier. The demand is for
the period 11.7.85 to 31.3.88. So long as the establishment is covered by
the provisions of the Act it is not open to the respondent to circumvent its
B liability by contending that before actual recovery proceedi~ it had closed
down. If the finding of the High Court is accepted it would be the easiest
way to evade the provisions of the Act.

In R.M. Lakshmanamurthy v. The Employees' State Insurance Cor-
C poration, Bangalore, [1974] 4 SCC 365. This Court has held that it is a
beneficial piece of social security legislation in the interest of labour.
Further, the provisions of the Act will have to be construed with that end
in view in order to promote the scheme and avoid the mischief.

Under section 26 of the Act all contributions are paid into a common
D fund. Such a fund will have to be administered for the purposes of the Act
as indicated under section 28. Therefore, the employer cannot contend that
he did not collect the employees' contribution and hence, he cannot be
called upon to pay. Thus the impugned judgment is wrong and is liable to
be set aside.
E
Per contra, Mr. P. Surbramanian Poti, learned senior counsel for the
respondent would argue that the contention of the respondent throughout
was that at no time it engaged 20 or more employees. Therefore, it was
under the belief that the Act would not be applicable. In that belief the
employer did not recover from the employees any contribution. Nor was
F the employer called upon during that relevant time to comply with the
provisions of the Act. It was entirely due to the fault of the Officers of the
appellant, the respondent did not make the contribution.

In any event, the establishment had been closed down on 31.3.88. It
G will be unjust to enforce the provisions of the Act and to seek to recover
contribution after the closure, more so, when the employees have settled
their claims and have gone away. Certainly, such a situation is not con-
templated under the Act From this point of view the judgment of the High
Court is right and does not call for any interference.

H In order to appreciate the rival contentions, it would be useful to set
E.S.J.C. v. HOTEL KALPAKA [MOHAN, J.] 225

out the necessary legal background. A
The Employees State Insurance Act is an act for certain benefits to
employees in. cases of sickness, maternity and employment injury and to
make provision for certain other matters in relation thereto. Section 1(4)
makes it applicable to all factories, in the first instance. Under sub-section
(5) of the said section, the Government may, by a Notification, extend the B
provisions of the Act to any other establishment or class of establishment;
industrial, commercial, agricultural or otherwise. Admittedly, in this case,
the hotel industry like that of the respondent has been notified under the
Act. Under section 26, a fund called Employees' State Insurance Fund is
created by all the contributions paid under this Act, the purposes, for c
which it may be expended, are catalogued under section 28.

Section 38 requires all employees in factories or establishments shall
be insured. Section 39 talks of contribution. In respect of an employee it
shall comprise of contribution payable by the employer (employer's con-
tribution) and contribution payable by the employee. It is this contribution D
which has to be paid to the Corporation. Section 40 imposes the liability
to pay contributions, in the first instance, on the principal employer. After
such contribution the employee's contribution could be deducted from his
wages. Sub-section (4) of section 40 is important. That says as follows:

"(4) Any sum deducted by the principal employer from wages
E
under this Act shall be deemed to have been entrusted to him
by the employee for the purpose of paying the contribution in
respect of which it was deducted." (Emphasis supplied)

Therefore, this sub-section puts the matter beyond doubt that there F
is an entrustment. In other words. the ·employer is a trustee.

Under sectiM 44 there is an obligation on the employer to furnish
returns and maintain registers.

The benefits available to the insured persons are stated in section 46: G
1. Sickness

2. Maternity

3. Disablement H
226 SUPREME COURT REPORTS [1993] 1 S.C.R.

A 4. Injury
)...
5. Medical treatment for and attendance on insured persons.

Lastly, there is power to prosecute under section 85 which includes
punishment for failure to pay contributions as well as for contravention of
B or non-compliance with any of the requirements of the Act. In the above
legal background we may analyse the factual situation.

Two facts stare at us. '}~

1. The liability to contribution of the respondent-employer relates to
c a period between 11.7.85 to 31.3.88. -,

2. The respondent-establishment was closed on 31.3.88.

The contention of the respondent that at no time there were 20 or
more employees in his establishment has to be rejected because at no point -~
D of time the respondent sought an adjudication on this aspect. On the
contrary, the inspections made by the officials of the appellant on 8.12.86,
September 87 and October 87 state to the contrary. Therefore, we have to
proceed "on the basis that the provisions of the Act are applicable to the
respondent-establishment, since (i) it is a notified industry, (ii) in the
'
>-._ ..,.
E establishment more than 20 employees were,working at the relevant time.
From the above provisions it is clear that from the date of his
commencement of business, namely, 11.7.85, there was a liability to con-
tribute. It has already been seen under section 40 the primary liability is
his, to pay, not only the employer's contribution but also the employee's
F contribution. Therefore, he cannot be heard to contend that since he had
not deducted the employee's contribution on the wages of the employees, ~
he could not be made liable for the same. The object of making a deeming
entrustment sub-section (4) of section 40 will be altogether rendered
nugatory if such a contention were to be accepted. After all, when he makes
employ~e's contribution he is entitled to deduct from the wages. Therefore,
G
by force of the application of the statutory provisions, the liability to
contribute, during this relevant period, namely, 11.7.85 to 313.88, arose.
_;>...._
There is no gainsaying in that. Hence, we reject the arguments of Mr.
Subramanian Pot~ learned senior counsel for the respondent.

H From the above statutory provisions, it would be clear that from out
•
E.S.l.C. v. HOTEL KALPAKA [MOHAN, J.] '121

of the common fund maintained under section 26, the employees derive A
various benefits like sickness, maternity, disablement, injury, medical treat-
ment for and attendance on insured persons. Therefore, it is a beneficial
piece of social security legislation. As a matter of fact, this Court had
occasion to consider the same in B.M. Lakshmanamunhy's case (supra).
At page 370, paragraph 16 it was held :
B
"The Act is thus a beneficial piece of social security legislation
in the interest of labour in factories at the first instance and
with power to extend to other establishments. Provisions of the
Act will have to be- construed with that end in view to promote
the scheme and avoid the mischief." C

Mr. M.L. Verma, learned senior counsel for the appellant is right in
his submissions in this regard.

The Insurance Court as well as the High Court have correctly upheld
the demand for contribution. But it is rather strange to conclude that the D
demand could not be enforced against a closed buiness. If this finding were
to be accepted it would not promote the scheme and avoid the mischief.
On the ·contrary, it would perpetrate the mischief. Any employer can easily
avoid his statutory liability and deny the beneficial piece of social security
legislation to the employees, by closing down the business before recovery. E
That certainly is not the indentment of the Act. To hold, as the High Court
has done, would set at naught all these beneficial provis~ons.

It is equally fallacious to conclude that because the employees had
gone away there is no liability to contribute. It has to be carefully remem- F
bered that the liability to contribute arose from the date of commencement
of the establishment and is a continuing liability till the closure. The very
object of establishing a common fund under section 26 for the benefit of
all the employees will again be thwarted if such a construction is put.

We cannot also accept the finding of the High Court that because G
Ext. P3 notice was issued on 23.6.88 after the closure of the respondent-
establisbment on 31.3.88, the appellant was not justified in proceeding
against the respondent. The proceeding for the recovery is of the dues of
contribution which arose prior to the closure on 31.3.88. Therefore, it
matters little when notice was issued, calling upon to pay the contribution. H
228 SUPREME COURT REPORTS (1993] 1 S.C.R.

A In our considered view, such a notice is only a reminder to the employer
to discharge his statutory obligation.

For all these reasons, we have little hesitation in seiting aside the
impugned judgment of the High Court which in turn upholds the order of
Employees' State Insurance Court. The appellant will be entitled to
B proceed with the recovery proceedillgs in accordance with law.

Accordingly, the appeal will stand allowed with costs.

G.N. Appeal allowed.