Delhi High Court
Khanna M.R. vs Union Of India (Uoi) And Ors. on 13 September, 2006
Equivalent citations: (2006)IIILLJ1047DEL
Author: Shiv Narayan Dhingra
Bench: Shiv Narayan Dhingra
JUDGMENT Shiv Narayan Dhingra, J.
1. By this petition, petitioner has prayed that the proceedings initiated by ESI Corporation and Recovery Officer under ESI Act for recovery of the amount due to the corporation from M/s. Black Eye Detection and Security Services Private Limited (for short the 'Company') be quashed and directions be given to ESI Corporation to do recovery from the principal employer and stay the arrest (and recovery proceedings) of the petitioner and award compensation of Rs. 20 lakh to the petitioner for causing mental agony, harassment.
2. Briefly, the facts are that the Company was incorporated as a Private Limited Company by family members of the petitioner. In this company petitioner was one of the Directors and his son Ramesh Khanna was the Managing Director. The Company was engaged in employing security guards and detectives and these security guards were deployed as per requirement of their clients. The Company was covered under the ESI Act, However, company failed to deposit the dues of ESI for the period April 1995 to June 1997. A notice was sent to the Company on 8th July, 1997 asking the Company that contribution of the employees towards ESI be deposited and challan of deposit be sent to the Division Officer of the Corporation within 15 days. Company was informed vide this notice that in case payment of contribution is not made, interest @ 12% per annum shall be liable to be paid. Despite the notice, no payment of ESI contribution was made. An order under Section 45-A was passed by the Assistant Regional Director wherein it was stated that Mr. S.S. Sharma, Manager, attended the office for personal hearing on July 28, 1997 and informed that he has deposited contribution from January 1997 to August 1997 only against the demand of the contribution from April 1996 to June 1997 for a sum of Rs. 4,28,278/-. The Assistant Regional Director considered the record and found that employer had not deposited regular ESI contribution from March 1993 to March 1997. The balance contribution payable for period April 1993 to March 1997 was finally determined as Rs. 3,74,220/-. An order was passed for payment of this contribution with interest @ 15% for each day of default up to the date of payment within a period of 15 days. The order was passed against Mr. Ramesh Khanna, Managing Director. Despite passing this order no amount was deposited. Thereafter Recovery Officer was directed by the Assistant Regional Director to effect the recovery of the due amount. A letter was written by ESI to Recovery Officer on September 8, 1997 for recovery of the dues for the period April 1995 to March 1997 amounting to Rs. 3,74,220/-plus interest of Rs. 73,619/-. In this letter written to the Recovery Officer, Mr. Ramesh Khanna was shown as the principal employer. Still no recovery could be made from this Company and thereafter notice were sent to other two Directors in February 1998 namely Mr. M.R. Khanna and Mr. Ashok Verma for attending the office and payment of the dues. When show cause notice was sent by the Recovery Officer to Mr. M.R. Khanna and Mr. Ashok Verma, Mr. M.R. Khanna wrote a letter to recovery officer on December 15, 1998 depicting that due to unavoidable circumstances such as payment of income tax, house tax and renovations of house, he could not pay monthly installment; the Managing Director was responsible for all liability of the Company, he (Mr. M.R. Khanna) would however pay the Installment in first week of January 1999. One Mr. Satya Kam Saini was authorized by Mr. M.R. Khanna to appear on his behalf before the Recovery Officer. Mr. S.K. Saini, Advocate sought some time from Recovery Officer to deposit the due amount and he wrote to the Recovery Officer that as per the record of the Company the liability was of Rs. 85,000/- for the period from April 1995 to March 1997 and an amount of Rs. 53,000/- has already been deposited and another amount of Rs. 10,000/- was being deposited. He sought two months time to settle the dispute and deposit the due amount. Thereafter, again no amount was deposited and the interest on dues kept on mounting. The total amount recoverable in 1998 was Rs. 4,47,859/-. When the amount was not paid by any of the Directors and none of the Directors were available, warrant of arrest were issued by the Recovery Officer. Petitioner filed a suit for permanent injunction before ESI Court challenging the recovery in the January 1999 only when respondent Nos. 3 and 4 threatened the attachment of the house and bank accounts of the petitioner to affect the recovery. ESI Court asked the petitioner to deposit the 50% of the amount on an application for interim relief. Assurances were given to the ESI Court time and again for deposit of this amount but this amount was not deposited. On November 11, 1999 ESI Court further extended time for deposit of 50% of the amount within seven days. The petitioner availed interim injunction without depositing the amount. On September 6, 2000 counsel for the petitioner assured the Court that 50% of the amount shall be deposited before the next hearing. The Court directed that in case 50% amount was not deposited till the next hearing, the interim order shall be vacated. Till October 30, 2000 petitioner did not deposit this amount, when the Court vacated the interim stay observing that the petitioner has misused the discretion exercised by the Court in his favor and ordered that respondent was at liberty to take action for recovery. The suit of the petitioner was dismissed by the ESI Court vide order dated September 20, 2004 In the meantime petitioner filed this writ petition in December 2003 with the above prayer.
3. It is submitted that petitioner had resigned from the post of Directorship in June 1997. His resignation was accepted by the Company on October 1, 1997. The plea of the petitioner is that respondent No, 3 had passed the order for recovery of due amount against the principal employer and it was the principal employer who was liable for the payment of the amount. Principal employer in this case was Managing Director of the company namely Mr. Ramesh Khanna. He was solely responsible for the payment of contribution and the petitioner had nothing to do with the affairs of the Company. The resignation of the petitioner and other Directors i.e. Mr. M.R. Khanna and Mr. Ashok Verma, had been accepted with effect from October 1, 1997 by Mr. Ramesh Khanna as Managing Director of the Company. Petitioner was, therefore, not at all concerned with the Company and no recovery be made from the petitioner. The order of the recovery and notice being sent to the petitioner and the proceedings initiated against the petitioner for attachment of the property and bank accounts and issuance of warrants were illegal and without jurisdiction. Petitioner had appeared before the Recovery Officer and informed him about the situation and respondent No. 4 detained the petitioner and he was released only when he deposited Rs. 20,000/-.
4. In the counter affidavit it is stated by the respondent that the Directors of the Company were changing designation for their convenience to escape the liability. ESI Act was a social beneficial legislation and was aimed to protect employees whenever they meet with accident resulting in disability, etc. and when they fall ill or to give maternity benefit, etc. The Directors of the Company were guilty of deducting contribution from the salary of the employees and not depositing the same with the respondent corporation. It was an offence under Section 85-A of the ESI Act and under Sections 406-407 of IPC. It is submitted that principal employer includes the Directors of a Company when company is a Private Limited Company and the petitioner being one of the Directors was responsible for payment of the contribution. It is also stated in the counter affidavit that the resignation of Mr. M.R. Khanna was a fabricated document. Since the company was a family concern, fabrication of resignation was a device to play fraud. Mr. Ramesh Khanna who is stated to be sole responsible person is untraceable. The action of the respondent for recovery was being taken as per the provisions of the Act and there was no illegality. The recovery could be made from the employer even by arrest or detention in prison. The petitioner being a Director was one of the employers.
5. During the argument, it was vehemently argued by the learned Counsel for the petitioner that Director of a Private Limited Company cannot be the principal employer and cannot be responsible to pay contributions of ESI.
On the other hand it is contended by learned Counsel for the respondent that the petitioner was one of the Directors of a Private Limited Company, a family concern of petitioner and his son and it was father and son who had deducted the ESI contribution from the salary of the employees and not paid the same to the Corporation.
6. It is undisputed fact that Black Eye was a family company and only family members of petitioners were share holders and Directors of the company. The address of Mr. Ramesh Khanna, who is son of the petitioner given in all his earlier correspondence with ESI is the same as that of the petitioner i.e. H-89, Lajpat Nagar. The Company had opened office at 169, defense Colony, Flyover Market. In a Private Limited Company share holders are either close friends or family members. Its shares are held closely by a well knit group.
In this case also the Company was being run by this family in which father and son were Directors living under the same roof.
7. In Kapila Hingorani v. State of Bihar 2003-III-LLJ-31 (SC), Supreme Court held as under at p. 40:
25. It is now well-settled that the Corporate veil can in certain situations be pierced or lifted. The principles behind the doctrine is a changing concept and it is expanding its horizon as was held in the State of Uttar Pradesh and Ors. v. Renusagar Power Company and Ors. . The ratio of the said decision clearly suggests that whenever a corporate entity is abused for an unjust and inequitable purpose, the Court would not hesitate to lift the veil and took into the realists so as to identify the persons who are guilty and liable therefore.
26. The proposition that a company although may have only one shareholder will be distinct juristic person as adumbrated in Industrial Salomon v. Salomon and Co., 1897 AC 22, has time and again been visited the application of doctrine of lifting the corporate veil in revenue and taxation matters [See Dal Chand and Ors. v. Commissioner of Income Tax, Punjab 1944 (12) ITR 458 and Juggilal Kamlapati v. Commissioner of Income Tax, Uttar Pradesh ].
27. The corporate veil indisputably can be pierced when the corporate personality is found to be opposed to justice, convenience and interest of the revenue or workman or against public interest [See CIT, Madras v. Meenakshi Mills Ltd. and Ors. 1967 SCR 934; Workmen Employed in Associated Rubber Industry Ltd. v. Bhavnagar and Anr. ; New Horizons Ltd. and Anr. v. Union of India and Ors. ; State of Uttar Pradesh and Ors. v. Renusagar Power Co. and Ors. (supra), Hussainbhai, Calicut v. Alath Factory Thozhilai Union, Kozhikode and Ors. and Secretary, HSEB v. Suresh and Ors. ].
8. I consider that in the present case also the Court has to lift the corporate veil and find out the reality. The petitioner and his son along with other family members opened a security company. They employed poor persons as security guards and from their salaries they deducted ESI contribution. This ESI contribution was to be paid to ESI for the benefit of the employees. Instead of paying ESI contribution to the employees this amount was swallowed by the company i.e. by its Directors. Father and son were living together when notices were issued to them to deposit the amount of poor employees. Son was not available at the house. Father did not provide address of the son who allegedly was the Managing Director of the company. Even during the arguments in the Court, the petitioner was asked to disclose his son's address but he stated that his son has separated from him and he does not know the address of his son. It is clear that the petitioner, on one hand, himself was not willing to deposit ESI contribution and took pleas of his old age, retirement from Government service, etc. and on the other hand was protecting his son from the authorities by not disclosing his address. I consider that both father and son were principal employers and equally responsible to deposit the amount jointly or severally. The plea taken by the petitioner that he was only a Director and not responsible for payment of the dues of ESI must fail.
9. The documents filed by the petitioner show that he was represented through his advocate before the Recovery Officer and stated that since he had spent amount on house renovation, payment of income tax, house tax he was not able to pay Installments so time be granted to him. He did not take plea that his son alone was responsible for payment of the amount. The plea of principal employer and occupier taken by the petitioner is not applicable in respect of a home grown organization which does not run a factory but runs only business of providing security guards to the clients. In case of such a company where only security guards are hired and deputed at the places of the clients, there can be no occupier of the factory. In such companies, mostly the directors are handling the entire work with the help of one or two staff persons.
10. It must be remembered that where a private limited company after deducting the ESI contribution of the employees does not pay the amount to the corporation for benefit of the employees and directors do not take responsibility for the payment, the Court must curb this attitude and directors must be held responsible jointly and severally for payment of such dues. Court cannot allow unjust enrichment of directors at the cost of poor employees and the amount deducted from salaries of employees and legal contributions must be recovered from directors. Justice does not demand that the statute should be interpreted in a manner to defeat the claim of poor employees. Justice demands that where a private limited company held by the family members whose Directors are father and son, does not pay ESI dues, the father and son should be held responsible jointly and severally for the dues.
11. I consider that in view of the peculiar facts and circumstances of this case it cannot be said that recovery proceedings against Mr. M.R. Khanna, petitioner, were unjust or illegal. The petitioner cannot be allowed to take the shield that he was not the principal employer, and his son, who is not traceable was the principle employer. ESI Act is a social beneficial legislation meant to protect the interest of the working class and an interpretation which defeat the very purpose of the ESI Act cannot be adopted. The provisions of a statute must be so interpreted so as to advance its social economic objective.
12. I therefore, consider that recovery proceeding against the petitioner were not illegal. I find no force in the writ petition. Writ petition stands dismissed.