On April 17, 2025, the Supreme Court of India ("Court") in Ajay Raj Shetty v. Director (Special Leave Petition (Criminal) No. 3743 of 2024), upheld the conviction of the general manager of Messrs. Electriex (India) Limited, Mr. Ajay Raj Shetty ("Appellant"), under Section 85(i)(b) of the Employees' State Insurance Act, 1948 ("ESI Act") for non-remittance of ESI contributions to the Employees State Insurance Corporation ("ESIC" or "Respondent") under the ESI Act, despite deduction of the same from the employees' wages.
Facts
On February 1, 2011, the ESIC carried out an inspection at the factory premises of M/s Electriex (India) Limited ("Company") to verify deductions towards ESI contributions for the period commencing February 1, 2010, to December 31, 2010. Pursuant to the inspection, it was revealed that while ESI contributions amounting to Rs. 8,26,696 (Rupees eight lac twenty-six thousand six hundred ninety-six) had been deducted from employees' wages, it was not remitted to the ESIC. Accordingly, a report was prepared by the officials, wherein Mr. Ajay Raj Shetty was identified as the 'General Manager' and 'Principal Employer' of the Company under the ESI Act, and a complaint was filed against him by the ESIC for failure to pay the ESI contributions.
Procedural History
On September 28, 2013, the Special Court for Economic Offences, Bangalore, convicted Mr. Shetty under Section 85(i)(b) of the ESI Act, and sentenced him to 6 (six) months' imprisonment along with a fine of Rs. 5,000 (Rupees five thousand). The conviction and sentence were upheld by both the Fast Track Court and the Karnataka High Court. Finally, a Special Leave Petition was filed before the Supreme Court.
Contention of the Appellant
The counsel for the appellant contented that the appellant was merely a 'technical coordinator', rather than the 'general manager' or 'principal employer' of the Company. It was further argued that the respondent had failed to conclusively prove his appointment as general manager, relying solely on the ESIC inspection report, which he claimed was inadmissible as the official who prepared it was not brought before the court for cross-examination. Notably, the Company supported this claim and argued that one Mr. Ajit Hegde, a promoter, was the 'principal employer' and noted that appellant had cleared the balance amount of Rs. 6,86,696 (Rupees six lac eighty-six thousand six hundred ninety-six) of ESIC dues on December 22, 2023, despite not being the principal employer.
It was also contended that since the company was declared sick since 2001, ESIC ought to have exercised its discretionary power under Regulation 31C of the Employee State Insurance (General) Regulations, 1950, and accordingly adopted a more liberal stance instead of initiating criminal proceedings.
Contention of the Respondent
The counsel for the Respondent contented that the appellant had failed to produce any documentary evidence to prove he was only a 'technical coordinator', despite having ample opportunity to do so.
Relying on the judgement of the Madras High Court judgment in Pentafour Products Limited v. Union of India (2005 SCC Online Mad 841), it was argued that a company's sick status does not prohibit criminal proceedings against it. Further, it was also contented that despite sufficient evidence to, the appellant was actually convicted under Section 85(i)(b) of the ESI Act, which carries a lesser sentence than Section 85(i)(a) of the ESI Act, thus already receiving leniency.
Findings
The Court while examining the definition of 'principal employer' under Section 2(17) of the ESI Act observed that it includes a person functioning as a 'managing agent' or responsible for the supervision and control of an establishment. Therefore, it was held that designation of a person is immaterial as long the person can otherwise be classified as an agent of the owner/ occupier and supervises or controls the establishment. In that regard, the Court held that the Appellant was given multiple chances to controvert the finding that he was not employed as a general manager; however, the Appellant neither produced any evidence, such as appointment letters or pay slips to substantiate his claim of being merely a 'technical coordinator' nor could he identify who actually held such a position during the relevant period. Therefore, he would fall within the ambit of Section 2(17) of the ESI Act.
Regarding sentencing, the Court observed that the Trial Court had actually imposed a lesser sentence under Section 85(i)(b) of the ESI Act, instead of the more severe Section 85(i)(a) of the ESI Act, which is the charging section for non-remittance of contribution. The Court also analyzed its previous decision in the case of ESI Corporation v. A.K. Abdul Samad ((2016) 4 SCC 785), clarifying that while courts have discretion to reduce the term of imprisonment under the proviso to Section 85(i) of the ESI Act, they have no discretion to reduce the fine amount below the statutory minimum.
Implications and Significance of the Judgment
This decision represents a significant development in labour law jurisprudence in India and also lays down important considerations from a corporate governance standpoint, as set out below:
1. By adopting a functional approach in determining liability under the ESI Act, the Court has clearly highlighted that corporate officers cannot escape liability merely by claiming they held a different designation, as long as their role and responsibility within an organization can fall within the broad definition of 'principal employer' under the ESI Act;
2. The decision reinforces that a company's status as a 'sick industry' does not shield its officers from criminal liability for non-payment of statutory dues. This is particularly significant in the Indian context, where many companies undergo financial restructuring through different mechanisms.
3. By upholding the conviction despite the eventual payment of dues, the Court sends a clear message that statutory compliance regarding employee benefits is not merely a civil obligation but carries criminal consequences, if violated. Further, the judgment clarifies the limited judicial discretion in sentencing under the ESI Act, i.e., while courts can reduce the term of imprisonment under the proviso to Section 85(i) of the ESI, they cannot reduce the fine amount below the statutory minimum.
As India continues to evolve its labour law framework, this judgment will likely serve as an important precedent reinforcing the protective intent of social security legislation like the ESI Act and thereby ensuring that their statutory benefits are safeguarded through strict enforcement mechanisms, regardless of the company's financial health.
Please find a copy of the Judgement, here.
This update has been contributed by Aayush Kumar (Partner) and Anoushka Goel(Associate).
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