Holding

Directors are not personally liable for payment of wages under the Payment of Wages Act, 1936 as amended, because the Act does not incorporate the "occupier" concept and liability is confined to the employer and any person named as factory manager.

Summary

The Supreme Court examined whether directors of Jiyajirao Cotton Mills Ltd., a company that owned factories, could be held personally liable for unpaid wages under the Payment of Wages Act, 1936 as amended by the Madhya Pradesh Industrial Relations Act, 1960. The Court held that the Act does not incorporate the "occupier" concept introduced by the 1987 amendment to Section 2(n) of the Factories Act, 1948, and therefore liability under the Act is limited to the employer and any person named as factory manager. Consequently, the directors, who were neither the employer nor named managers, could not be treated as personally liable. The Court also clarified the distinction between mere statutory reference and incorporation, rejecting the High Court’s reliance on the occupier notion. As a result, the High Court’s judgment holding the directors liable was set aside, the directors' appeal was allowed, and the appeals of the functionaries and the State were dismissed.

Issues considered

Whether directors of a company owning a factory are personally liable for payment of wages under the Payment of Wages Act, 1936 as amended by the Madhya Pradesh Industrial Relations Act, 1960.
Whether the concept of "occupier" from Section 2(n) of the Factories Act, 1948 (as amended in 1987) is incorporated into the Payment of Wages Act, 1936.
How statutes that merely reference other statutes should be interpreted with respect to subsequent amendments (reference vs incorporation).
Whether the High Court erred in holding the directors liable by importing the occupier concept.
Whether the corporate veil can be lifted to impose personal liability on directors for wage claims.

Legislation cited

Companies Act, 1956s. 291, s. 5
Employees' State Insurance Act, 1948s. 2(17)
Factories Act, 1948s. 2(n)
Indian Penal Code, 1860s. 193, s. 219, s. 228
Industrial Disputes Act, 1947s. 25
Madhya Pradesh Industrial Relations Act, 1960s. 3
Payment of Wages Act, 1936s. 15, s. 3
Sick Industrial Companies (Special Provisions) Act, 1985s. 3

Subjects

Payment of Wages ActDirector liabilityOccupier conceptStatutory interpretationIncorporation by referenceCorporate veilWage paymentMadhya Pradesh

Judgment

A P.C. AGGARWALA
v.
PAYMENT OF WAGES INSPECTOR, M.P. AND ORS.

SEPTEMBER 26, 2005

B [ARIJIT PASA YAT AND H.K. SEMA, JJ.)

Payment of Wages Act, 1936-Sections 3 and 15-Madhya Pradesh
Industrial Relations Act, 1960-Section 3-Factories Act, 1948-Section
C 2(n)-Factory-Payment of Wages-Liability for-Concept of occupier
provided in Section 2(n) of Act of 1948, as well as its amendment in year
1987, is not applicable to Act of 1936, as amended in year 1964 by Section
3 of State Act-Under Section 3 of the State Act only a person named as
Manager of Factory and employer jointly, is made liable, and if a Director
of Company owning the Factory was not so named, he could not be made
D liable-Even otherwise also, Act of 1936 has statutorily not fcxed any liability
on the Directors of Company-Companies Act, 1956-Sections 5 and 291.

Interpretation of statutes-Reference versus incorporation of provision
of one statute into another-Reference brings in subsequent amendment to
provision-In case of incorporation, any subsequent amendment/repeal of
E provision does not affect the incorporated provision.

Appellant is director of a Company owning certain factories that had
ceased production. Inspector under Payment of Wages Act, 1936 filed an
application under Section 15 thereof before concerned Magistrate for
F directions to Factory Manager and Directors of the Company for payment of
wages for various periods. Factory manager replied to the notice contending
inter alia that only he was responsible for payment of wages under the above
Act, and no notice could be issued to Directors. However, authorities under
the Act held the Directors personally liable to pay the wages, and this view
was upheld by the High Court. Hence the present appeal.
G
Appellant contended that the provisions of the Act of 1936 and
amendment in Section 3 in the year 1964 by Madhya Pradesh Industrial
Relations Act, 1960 were not considered by High Court. It was further
contended that High Court erroneously proceeded on the basis that concept

H 514
P.C.AGGARWALAv.PAYMENTOFWAGESINSPECTOR,M.P. 515

of occupier, as introduced by amendment in year 1987 to Section 2(n) of A
Factories Act 1948 was incorporated in Section 3 of the Act of 1936.

Allowing the appeal, the Court

HELD I. There is no provision in Payment of Wages Act, 1936 like
Section 2(n) of the Factories Act, 1948. Sections 3 and 15 of the former, as B
amended by Section 3 of Madhya Pradesh Industrial Relations Act, 1960, with
effect from year 1964 only can apply to the fact situation of the present case.
These do not even by implication bring in the concept of occupier. (529-B-C)

JK. Industries and Ors. v. Chief Inspector of Factories and Boilers and
· Ors., [1996) 6 SCC 665, held inapplicable. C
2. The amendment to Section 2(n) of Factories Act, 1948 in the year
1987 does not apply to Madhya Pradesh Industrial Relations Act, 1960. If
there is mere reference to a provision without incorporation, then unless a
different intention appears it has to be considered as reference to the provision. D
If a provision is incorporated in another, any subsequent amendment or even
its repeal would not affect the provision as incorporated in the latter Statute.
(530-G; 531-AJ
Mriyappa v. State of Karanataka, (1988] 3 SCC 276, relied on.

Minister of Housing and Local Govt. v. Hartnell, 11965) l All ER 490 E
(HL), referred to.

3.1. As the High Court has proceeded to hold the Directors liable by
introducing the expression 'occupier' which expression is used in the
Factories Act and not in the Payment of Wages Act, 1936, the basic premises
on which the High Court proceeded are dearly untenable. Therefore, on a F
plain reading of the language of the governing statute, it cannot be held that
the Directors had any personal liability. (535-C-D)

Employees and State Insurance Corporation, Chandigarh v. Gurdial
Singh and Ors., (1999) Supp. 1 SCC 204, followed.

Employees State Insurance Corporation v. S.K. Aggarwal and Ors.,
G
(1998[ 6 SCC 288 and Indian Oil Corporn. ltd v. Chief Inspector ofFactories,
AIR (1988) SC 2456, relied on

3.2. Under Section 3 of the Payment of Wages Act, 1936, as amended
by Section 3 of Madhya Pradesh Industrial Relations Act, 1960, the liability H
516 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A is cast on a person who has been named as Manager of the Factory and the
employer jointly. Therefore, in order to find out whether the Director had a
responsibility for making the payment, two different things have to be
established: (i) he was employer or (ii) he was person who has been named as
Manager of the factory. In the instant case, there is no such allegation or
B evidence led. (532-D-E)

3.3. It is trite law that liability of a person is dependent upon the statutory
prescriptions governing such liability. Sections 5 and 291 of the Companies
Act, 1956 are to be noted in this regard. Section 5 refers to officer who is in
default. Section 291 on the other hand relates to general powers of the Board
C of Directors. In order to attract the liability under the Payment of Wages
Act, 1936, it has to be seen as to on whom the Act fixes responsibility for
payment of wages. It speaks of the 'employer' which expression is defined in
Section 2(i)(a). Section 15 refers to the claims arising out of deductions from
wages or delaying payment of wages and penalty for malicious or vexatious
claims. Statutorily no liability has been fixed on the Directors. (532-8-C]
D
Tata Engineering Locomotive Company Ltd v. State of Bihar, (1964) 6
SCR 885, relied on.

Palmer's Company Law, 20th Edn. p 136, referred to.

E CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8300 of2002.

From the Judgment and Order dated 30.8.97 of the Madhya Pradesh
High Court in L.P.A. No. 55of1997.

WITH
F
C.A. Nos. 8301-8303/2002 and 692 of2005.

Dushyant Dave, Ramesh Singh, Ms. Nina Gupta, Ms. Shiva Lakshmi,
Ms. Neelam Singh, Ms. Meha Kiran, Ms. Bina Gupta, Ms. Vibha Datta Makhija,
N.R. Choudhary, Somnath Mukherjee, Ramesh Singh, K. Bhirava Swamy and
G Sanjay Kapur for the appearing parties.

The Judgment of the Court was delivered by

ARIJIT PASAYAT, J. All these appeals involve identical issues. By
judgments rendered by Division Bench of the Madhya Pradesh High Court,
H impugned in the appeals held that Directors of Jiyajirao Cotton Mills Ltd.
P.C.AGGARWALAv.PAYMENTOFWAGESINSPECTOR,M.P.[PASAYAT,J.] 517

(hereinafter referred to as the 'Company') to be personally liable for the A
payment of wages to the workmen of the company under the Payment of
Wages Act, 1936 (in short the 'Act'). However, the authorities under the Act
could proceed against the assets of the company in the hands of the Directors
or the assets acquired from income of the company by the Directors. The
personal property of the Directors, however, could not be proceeded against
if it acquired from the sources other than the income of the company. The B
Letters Patent Appeals filed against the judgments of the learned Single
Judge were dismissed. It is to be noted that learned Single Judge had held
· that writ petitions were not maintainable as the writ petitioners had an alternative
remedy under Section 17 of the Act. However, the Letters Patent Court
considered the case on merits and as noted above came to the conclusion C
about liability of the Directors.

While .the Directors who were writ petitioners had questioned
correctness of the judgments rendered by the Division Bench, the functionaries
under the Act have questioned correctness of that part of the High Court's
judgment which restricted recovery from the assets acquired out of the D
company's income.

Background facts on which the dispute arises are as under:

In June 1991, the Company made an application to the State Government
under Section 25-0 of the Industrial Disputes Act, 1947 (in short the 'ID Act') E
as substituted by the Industrial Disputes (Madhya Pradesh Amendment) Act,
1983 (in short 'Madhya Pradesh Act') Act 32of1983 with effect from 28.10.1983
seeking permission for closure of cotton section of the Company. The State
Government by order dated 18.8.1991 rejected the application on the ground
that the same was pre-mature and the solution actually lay in re-deployment F
of the workforce and technical up-gradation. An application for review was
made on 4.9.1991. Between April 1992 and April I997 according to the Company
all the factories ceased production on account of disconnection of electricity.
·One particular trade union filed an application before the Labour Court in
Gwalior .under Sections 36, 6 I and 64A of the Madhya Pradesh Industrial
Relations Act, 1960 (iii short the 'MPIR Act'). The Labour Court held that the G
lay off was illegal and directed the Company to withdraw the same. On being
moved under Section 67 read with Section 64A of the MPIR Act, the Industrial
Court by order dated 2.5.1992 modified the same. The order was challenged
by a writ petition before the High Court; An interim order was passed directing
payment of 50% of total back wages plus dearness allowance. Disputes of H
518 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A this nature continued and on 28.8.1992 the Company made a .reference to the
Board of Industrial and Financial Re-construction (in short the 'BIFR') under
Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (in
short the 'SICA'). Subsequently, application was filed by Mazdoor Congress
demanding payment of wages for certain periods. In January 1993 BIFR
declared the Company to be a sick industrial company under Section 3(1 )( o)
B of SICA. Notices were issued by the functionaries under the Act calling upon
the Company through its Factory Manager to explain non payment of wages
for certain periods in violation of Section 5 of the Act. For subsequent
periods also, similar notices were issued. Copies of the notices were endorsed
to the Directors of the Company. Subsequently, the Payment of Wages
C Inspector filed application under Section 15 of the Act before the concerned
Magistrate against the Factory Manager, Shri K.B. Kaul and eight others who
were Directors of the Company including the present appellants praying for
directions to them for payment of wages for various periods. The Factory
Manager submitted his reply. In particular, it was submitted by him that the
application was vague since details of the workmen whose wages were allegedly
D not paid had not been given as required under the law. It was also stated that
notice could not be issued to the Directors as only the Company and the
Factory Manager were responsible for payment of wages under the Act.
Pendency of the proceedings under the BIFR was also referred to. However,
the authorities under the Act rejected the contention and held that the
E Directors were also personally liable to pay. Such directions were questioned
before the High Court and as noted above, impugned judgments were passed.

In support of the appeals, filed by the erstwhile Directors, learned
counsel submitted that the High Court has failed to maintain the distinction
between the liability of the company and its Directors. The provisions of the
F Act and the amendments brought in by the Madhya Pradesh Act of 1964
have not been kept in view. The High Court erroneously proceeded on the
basis as if the Directors were occupiers to hold that the decision of this Court
in J.K. Industries and Ors. v. Chief Inspector of Factories and Boilers and
Ors., [ 1996] 6 SCC 665 applied to the facts of the case. In that case the
G provisions were entirely different and the ratio of that decision has no
application to the facts of the present case. The stand of the authorities under
the Act and the Labour Unions on the other hand is that looking at the
beneficial nature of the statute, the High Court was justified in its conclusion.
In any event, by application of the principles of legislation by incorporation
or by reference the view taken by the High Court cannot be faulted.
H
P.C.AGGARWALA v. PAYMENTOFWAGESINSPECTOR,M P [PASAYAT,J.] 519

In order to appreciate the rival submissions the relevant provisions A
under the Act and the Amendment thereto by Madhya Pradesh Act of 1964
need to be noted. They are as under:

Section 2. DEFINITIONS.

In this Act, unless there is anything repugnant in the subject or B
context, -

(i) "employed person" includes the legal representative of a deceased
employed person;

(ia) "employer" includes the legal representative of a deceased C
employer;

(ib) "factory" means a factory as defined in clause (m) of section 2
of the Factories Act, 1948 (63 of 1948) and includes any place to
which the provisions of that Act have been applied under sub-section
(1) of section 85 thereof;
D
(ii) "industrial or other establishment" means any, -

(a) tramway service, or motor transport service engaged in carrying
passengers or goods or both by road for hire or reward;

(aa) air transport service other than such service belonging to, or E
exclusively employed in the military, naval or air forces of the Union
or the Civil Aviation Department of the Government of India;

(b) Dock wharf or jetty;
:~

(c) inland vessel, mechanically propelled;
F
(d) mine, quarry or oil-field;

(e) plantation;

(t) workshop or other establishment in which articles are produced,
adapted or manufactured, with a view to their use, transport or sale; G
(g) establishment, in which any work relating to the construction,
development or maintenance of buildings, roads, bridges or canals, or
relating to operations connected with navigation, irrigation or to the
supply of water, or relating to the generation, transmission and
distribution of electricity or any other form of power is being carried H
520 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A on;

(h) any other establishment or class of establishments which the
Central Government or a State Government may, having regard to the
nature thereof, the need for protection of persons employed therein
and other relevant circumstances, specify, by notification in the Official
B Gazette;

(iia) "mine" has the meaning assigned to it in clause Q) of sub-section
(I) of section 2 of the Mines Act, 1952 (35 of 1952);

(iii) "plantation" has the meaning assigned to it in clause (f) of section
C 2 of the Plantations Labour Act, 1951 (69 of 1951);

(iv) "prescribed" means prescribed by rules made under this Act;

(v) "railway administration" has the meaning assigned to it in clause
(6) of section 3 of the Indian Railways Act, 1890 (9 of 1890); and

D (vi) "wages" means all remuneration (whether by way of salary,
allowance or otherwise) expressed in terms of money or capable of
being so expressed which would, if the terms of employment, express
or implied, were fulfilled, be payable to a person employed in, respect
of his employment or of work done in such employment, and includes-

E (a) any remuneration payable under any award or settlement between
the parties or· order of a court;

(b) any remjmeration to which the person employed is entitled in
respect of.'bertime work or holidays or any leave period;
.1
F (c) any addironal remuneration payable under the terms of employment
(whether called a bonus or by any other name);

(d) any sum which by reason of the termination of employment of the
person employed is payable under any law, contract or instrument
which provides for the payment of such sum, whether with or without
G deductions, but does not provide for the time within which the payment
is to be made;

(e) any sum to which the person employed is entitled under any
scheme framed under any !aw for the time being in force;

but does not include -
H
P.C.AGGARWALAv.PAYMENTOFWAGESINSPECTOR.M.P.[PASAYAT,J] 521

( 1) any bonus (whether under a scheme of profit sharing or otherwise) A
which does not form part of the remuneration payable under the terms
of employment or which is not payable under any award or settlement
between the parties or order of a court;

(2) the value of any house-accommodation, or of the supply of light,
water, medical attendance or other amenity or of any service excluded B
from the computation of wages by a general or special order of the
State Government;

(3) any contribution paid by the employer to any pension or provident
fund, and the interest which may have accrued thereon;

(4) any travelling allowance or the value of any travelling concession;
c
(5) any sum paid to the employed person to defray special expenses
entailed on him by the nature of his employment; or

(6) any gratuity payable on the termination of employment in cases D
other than those specified in sub-clause (d).

3. RESPONSIBILITY FOR PAYMENT OF WAGES.

Every employer shall be responsible for the payment to persons
empl_oyed by him of all wages required to be paid under this Act:
E
Provided that, in the case of persons employed (otherwise than by a
contractor) -

(a) in factories, if a person has been named as the manager of the
factory under [clause (f) of sub-section (1) of section 7 of the Factories
Act, 1948 (63 of 1948); F
(b) in industrial or other establishments, if there is a person responsible
to the employer for the supervision and control of the industrial or
other establishments;

(c) upon railways (otherwise than in factories), ifthe employer is the G
railway administration and the railway administration has nominated
a person in this behalf for the local area concerned.

The person so named, the person so responsible to the employer, or
the person so nominated, as the case may be; (shall also be responsible)
for such payment.
H
522 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A 15. CLAIMS ARISING OUT OF DEDUCTIONS FROM WAGES OR
DELAY IN PAYMENT OF WAGES AND PENALTY FOR MALICIOUS
OR VEXATIOUS CLAIMS.

(I) The State Government may, by notification in the Official Gazette,
appoint a presiding officer of any Labour Court or Industrial Tribunal,
B constituted under the Industrial Disputes Act, 1947 ( 14 of 1947) or
under any corresponding law relating to the investigation and
settlement of industrial disputes in force in the State or any
Commissioner for Workmen's Compensation or other officer with
experience as a judge of a Civil Court or as a stipendiary Magistrate
to be the authority to hear and decide for any specified area all claims
c arising out of deductions from the wages, or delay in payment of the
wages, of persons employed or paid in that area, including all matters
incidental to such claims :

Provided that where the State Government considers it necessary
so to do, it may appoint more than one authority for any specified area
D
and may, by general or special order, provide for the distribution or
allocation of work to be performed by them under this Act.

(2) Where contrary to the provisions of this Act any deduction has
been made from the wages of an employed person, or any payment
of wages has been delayed, such person himself, or any legal
E
practitioner or any official of a registered trade union authorized in
writing to act on his behalf, or any Inspector under this Act, or any
other person acting with the permission of the authority appointed
under sub-section (I), may apply to such authority for a direction
under sub-section (3):
F
Provided that every such application shall be presented within
twelve months from the date on which the deduction from the wages
was made or from the date on which the payment of the wages was.
due to be made, as the case may be:

G Provided further that any application may be admitted after the
said period of twelve months when the applicant satisfies the authority
that he had sufficient cause for not making the application within
such period.

(3) When any application under sub-section (2) is entertained, the
H authority shall hear the applicant and the employer or other person
P.C.AGGARWALA1'.PAYMENTOFWAGESINSPECTOR,M.P.[PASAYAT,.J1 523

responsible for the payment of wages under sectiqn 3, or give them A
an opportunity of being heard, and, after such further ~nquiry (if any)
as may be necessary, may, without prejudice to any other penalty to
which such employer or other person is liable under this Act, direct
the refund to the employed person of the amount deducted, or the
payment of the delayed wages, together with the payment of such B
compensation as the authority may think fit, not exceeding ten times
the amount deducted in the former case and not exceeding twenty-five
rupees in the latter, and even if the amount deducted or the delayed
wages are paid before the disposal of the application, direct the
payment of such compensation, as the authority may think fit, not
exceeding twenty-five rupees : c
Provided that no direction for the payment of compensation shall
be made in the case of delayed wages if the authority is satisfied that
the delay was due to -

(a) a bona fide error or bona fide dispute as to the amount D
payable to the employed person, or
(b) the occurrence of an emergency, or the existence of exceptional
circumstances, such that the person responsible for the payment
of the wages was unable, though exercising reasonable diligence,
to make prompt payment, or E
(c) the failure of the employed person to apply for or accept
payment.

(4) If the authority hearing an application under this section is satisfied

F
(a) that the application was either malicious or vexatious, the
authority may direct that a penalty not exceeding fifty rupees be
paid to the employer or other person responsible for the payment
of wages by the person presenting the application; or

(b) that in any case in which compensation is directed to be paid G
under sub-section (3), the applicant ought not to have been
compelled to seek redress under this section, the authority may
direct that a penalty not exceeding fifty rupees be paid to the
State Government by the employer or other person responsible
for the payment of wages.
H
524 SUPREME COURT REPORTS [2005) SUPP. 3 S.C.R.

A · (4A) Where there is any dispute as to the person or persons being
the legal representative or representatives of the employer or of the
employed person, the decision of the authority on such dispute shall
be final.

(4B) Any inquiry under this section shall be deemed to be a judicial
B proceeding within the meaning of sections 193, 219 and 228 of the
Indian Penal Code (45 of 1860).

(5) Any amount directed to be paid under this section may be
recovered-

c (a) if the authority is a Magistrate, by the authority as if it were
a fine imposed by him as Magistrate, and
(b) if the authority is not a· Magistrate, by any Magistrate to
whom the authority makes application in this behalf, as if it were
a fine imposed by such Magistrate.
D Amendment to the Payment of Wages Act vide Madhya Pradesh Act of
1964 with effect from 15.05.1964.

(a) In Section 2 after Clause (i), the following clause has been inserted
namely:
E "(i-a) 'Industrial Court' means the Industrial Court constituted
under Section 9 of the Madhya Pradesh Industrial Relations Act,
1960 (27 of 1960)", and
(b) After Clause (kk) the following clause has been inserted, namely:

F "(ii-a) 'Legal representative' means the person who in law
represents the estate of a deceased employed person.

In Section 3, for the proviso, the following proviso has been substituted,
namely:

"Provided that, in the case of persons employed (otherwise than by
G a contractor), -

. (d) in factories, if a person has been named as the manager of factory
under Clause (f) of sub-section (I) of Section 7 of the Factories Act,
1948 (63 of 1948) then the person so named and the employer jointly
H and severally;
PC.AGGARWALAv.PAYMENTOFWAGESINSPECTOR,M.P.[PASAYAT,J.] 525

(e) in industrial establishments, ifthere is a person responsible to the A
employer for the supervision and control of the industrial
establishment, then the person so responsible and the employer, jointly
and severally;

(f) upon railways (otherwise than in factories) if the employer is the
railway administration and the railway administration has nominated B
a person in this behalf for the local area concerned, then the person
so nominated; shall be responsible for such payment."

In Section 15-

(vi) in sub-section (I), for the words, "any Commissioner for workmen's C
compensation or other officer with experience as a Judge of a Civil
Court or as a stipendiary Magistrate to be the authority" the words
"one or more persons to be the authority" shall be substituted;

(vii) after sub-section(!), the following sub-sections shall be inserted,
namely: D
"(I-A) A person shall not be qualified for appointment as an
authority under this Act, unless he is a Commissioner for
workmen's compensation or any other officer with experience as
a Judge of Civil Court or of a Labour Court constituted under the
Madhya Pradesh Industrial Relations Act, 1960 (No. 27 of 1960). E
(1-8) Where more than one persons are appointed for any specified
area as authorities under sub-section (I), the State Government
may be general or special order, make arrangements as it thinks
fit for the distribution of work among the authorities so appointed";
F
(viii) In sub-section (2),-

(a) after the words "to Act on his behalf, the words, figures and
brackets "or a representative union recognized as such under the
Madhya Pradesh Industrial Relations Act, 1960 (27 of 1960)", shall be
inserted; G
(b) after the words, brackets and figure "sub-section (3)", the words
"and in case of death of the employed person, it shall be lawful for
his legal representative to make an application for such direction"
shall be inserted;
H
526 SUPREME COURT REPORTS (2005) SUPP. 3 S.C.R.

A (ix) In sub-section (3),-

(a) after the words "employed person", the words "or his legal
representatives, as the case may be'', shall be inserted;

(b) for the words "ten rupees in the latter", the words "twenty-
five rupees in the latter case and the authority may direct the
B payment of such compensation in case, where the amount
deducted or the delayed wages are paid by the employer, to the
employed person or his legal representative before the disposal
of the application" shall be substituted;

(c) in the proviso, after the words "employed person" occurring
c twice, the words "or his legal representative" shall be inserted,
and-

(x) for sub-section (4), the following sub-sections shall be substituted,
namely:
D "(4) if the authority hearing any application under this section is
satisfied,-

(i) that the application was either malicious or vexatious, the
authority may direct that any penalty not exceeding fifty rupees
be paid to the employer or other person responsible for the
E payment of wages by the person presenting the application; or

(ii) that, in any case in which compensation is directed to be paid
under sub-section (3), the applicant ought not to have been
compelled to seek redress under this section, the authority may
direct that a penalty not exceeding fifty rupees be also paid by
F the employer or other person responsible for the payment of
wages which shall, when paid or recovered, be credited to the
State Government.

(4-A) Where a question arises as to whether any person is or is not
a legal representative of the deceased employed person, such question
G shall be determined by the authority appointed under sub-section ( 1)
and his decision shall be final.
.,
(4-B) The payment of the amount directed to be paid under this
section to the employed person or his legal representative, as the case
may be, shall be full and complete discharge of the employer from the
H
liability to make such payment under this Act, and no further claim
P.C.AGGARWALAv.PAYMENTOFWAGESINSPECTOR,M.P.[PASAYAT,J.] 527
shall lie against the employer in respect thereof'. A
In JK. Industries' case (supra), the controversy related to the effect of
1987 amendment. In paras 26, 44 and 62 it was observed as follows:

"26- Thus, we find that after the 1987 amendment, the true import of
the proviso (ii) to Section 2(n) WClllld be that in the case of a company, B
which owns the factory, the Company cannot nominate any one of its
employees or officers, except a director of the company, as the occupier
of the factory. In other words an occupier of the factory in the case
of a company must necessarily be any one of its directors who shall
be so notified for the purposes of the Factories Act. Such an occupier C
cannot be any other employee of the Company of the Factory. This
interpretation of an 'occupier' would apply to all provisions of the
Act, wherever the expression occupier is used and not merely for the
purposes of Section 7 or 7-A of the Act.

44- As already noticed, where the company owns a factory it is the D
company which is the occupier, but since company is a legal abstraction
without a real mind of its own, it is those who in fact control and
determine the management of the company, who are held vicariously
liable for commission of statutory offences. The directors of the
company are, therefore, rightly called upon to answer the charge,
being the directing mind of the company. Dealing with the question E
of vicarious liability of the directors for offences committed by a
company, the following observations of Lord Diplock in Tesco
Supermarkets Ltd. v. Nattrass, (1972) AC 153 are useful:

"In my view, therefore, the question: what natural persons are F
to be treated in law as being the company for the purpose of acts
done in the course of its business, including the taking of
precautions and the exercise of due diligence to avoid the
commission of a criminal offence, is to be found by identifying
those natural persons who by the memorandum and articles of
association or as a result of action taken by the directors, or by G
the company in general meeting pursuant to the articles, are
entrusted with the exercise of the powers of the company. This
test is in conformity with the classic statement of Viscount Haldane,
Lord Chancellor, in Lennard's Carrying Co. Ltd. v. Asiatic
Petroleum Co. Ltd., (1915 AC 705) H
528 SUPREME COURT REPORTS [2005) SUPP. 3 S.C.R.

A The passage of Viscount Haldane, Lord Chancellor, in Lennard's
Carrying Co. Ltd., case (supra) referred to by Lord Diplock, is as
follows:

"A corporation is an abstraction. It has no mind of its own any
more than it has a body of its own; its active and directing will
B must consequently be sought in the person of somebody who
for some purposes may be called an agent, but who is really the
directing mind and will of the corporation, the very ego and
centre of the personality of the corporation. That person may be
under the direction of the shareholders in general meeting; that
person may be the board of directors itself, or it may be, and in
c some companies it is so, that that person has an authority
coordinate with the board of directors given to him under the
articles of association ..... ".

62.- To sum up our conclusions are:

D (I) in the case of a Company, which owns a factory, it is only one of
the directors of the Company who can be notified as the occupier of
the factory for the purposes of the Act and the Company cannot
nominate any other employee to be the occupier of the factory;

(2) Where the Company fails to nominate one of its directors as the
E occupier of the factory, the Inspector of the factories shall be at
liberty to proceed against any one of the directors of the company
treating him as deemed occupier of the factory, for prosecution and
punishment in case of any breach or contravention of the provisions
of the Act or for offences committed under the Act.

F (3) Proviso (ii) to Section 2(n) of the Act is intra vires the substantive
provision of Section 2(n) of the Act;

(4) Proviso (ii) to Section 2(n) is constitutionally valid and is not ultra
vires Articles I 4, I 9( I )(g) and 2 I of the Constitution of India;

G (5) The law laid down by the High Courts of Bombay, Orissa, Kamataka,
Calcutta, Guwahati and Madras is not the correct law and the contrary
view expressed by the High Courts of Allahabad, Madhya Pradesh,
Rajasthan and Patna is the correct enunciation of law in regard to the
ambit and scope of proviso (ii) to Section 2(n) of the Act."

H
P.C.AGGARWALAv.PAYMENTOFWAGESINSPECTOR,M.P.[PASAYAT,J.] 529

The judgment was rendered in the background of Section 2(n) proviso A
(ii) of the Factories Act, 1948 as amended in 1987. The question involved in
the said case was who can be nominated as occupier by a Company owning
the factory. Considering the said provision, it was held that only one of its
Directors and none of its employees or officers can be nominated as occupier
of the factory by such company. There is no such provision in the Act like B
Section 2(n) of the Factories Act. The quoted portion of the Act as amended
only can apply to the fact situation of the present case. Though, it was
contended by learned counsel for the State and the Labour Unions that
Section 3 as amended by the M.P. Amendment Act brought in the concept
of occupier, the contention has o.nly to be noted to be rejected. Section 3 of
the Act and the amended Section 3 by M.P. Amendment Act do not even by C
implication bring in the concept of occupier which formed the foundation in
J.K. Industries case (supra).

The principles of legislation by incorporation or by reference have been
dealt with by this Court in many cases.
D
A distinction has been made between a mere reference or citation of one
of the statutes into another and incorporation. A Statute may instead of
referring to a particular previous statute or to any specific provision therein
refer to the law on the subject generally. In such cases a reference is construed
to mean that the law is as it reads thereafter including amendments
subsequently to the time of adoption, as was noted by Sutherland; Statutory E
Construction, Vol. 2, 3rd Edn., p. 550 and supplement (1956), p. 119.

The legislation by referable incorporation falls into two categories. That
is (i) where a statute by specific reference incorporates the provisions of
another statute as at the time of adoption, and (ii) where a statute incorporates F
by general reference. The Law concerning a particular subject has a genus.
In the former case the subsequent amendments made in the referred statute
cannot automatically be read into the adopting statute. But in the second
category it may be presumed that the legislative intent was to include all the
subsequent amendments also made from time to time in the generic law on
the subject adopted by the general reference. G
In the former case a modification, repeal or re-enactment of the statute
that is referred will also have effect in the statute in which it is referred; but
in the latter case any change in the incorporation statute by way of amendment
or repeal has no repercussion on the incorporating statute. The rule that the
H
530 SUPREME COURT REPORTS [2005) SUPP. 3 S.C.R.

A repeal or amendment of an Act which is incorporated in a later Act has no
effect on the later Act or on the provisions incorporated therein is subject
to four exceptions. They are: (i) where the later Act and the earlier Act are
supplemental to each other, (ii) where the two Acts are in pari materia, (iii)
where the amendment of the earlier Act if not imported in the later Act would
B render itwholly unworkable, and (iv) where the amendment of the earlier Act
either expressly or by necessary intendment also applies to the later Act.
Even though only particular sections of the earlier Act are incorporated into
the later statute, in construing the incorporated provisions it may be necessary
and permissible to refer to other parts of the earlier statute which are not
incorporated. This does not however mean that a provision in the nature of
C a proviso or exception in the earlier Act which is not brought in by
incorporation can be read in a manner so as to limit the meaning of the
provision incorporated. Reference to other provisions of the earlier statute is
only permissible to. cull out meaning of the provision incorporated.

In the illuminating words of Lord Esher, M.R.:
D
"If a subsequent Act brings into itself by reference some of the
clauses of a former Act, the legal effect of that, as has often been
held, is to write those sections into the new Act as if they had been
actually written in it with the pen, or printed on it." (See Wood's
Estate. Re, exp Works and Buildings Commrs., (1886) 31 Ch D 607)
E
It may be added that clear intention of the incorporating Act cannot be
defeated by such provision of the earlier Act which have not been
incorporated. In the interpretation of an incorporated provision, the Court is
sometimes required to formulate variations of details in the context of the
-
incorporating statute. (See Mariyappa v. State of Karnatak.a, [1998] 3 SCC
F 276). The merit of legislation by incorporation is brevity which is sometimes
counterbalanced by difficulties and obscurities which it is likely to create.

In Minister of Housing and Local Govt. v. Hartnell, [1965] I All ER 490
(HL). It was observed that there is a regrettable modem tendency to overdo
G legislation by reference and to attempt brevity at the expense of lucidity.

The amendment to the Factories Act, 1948 (in short 'Factories Act')
does not apply to the M.P. Act. If there is mere reference to a provision
without incorporation, then unless a different intention appears it has to be
considered as reference to the provision. If a provision is incorporated in
G another, any subsequent amendment or even its repel would not affect the
P.C.AGGARWALAv.PAYMENTOFWAGESINSPECTOR,M.P.[PASAYAT,J.] 531

provision as incorporation in the latter Statute. A
In Employees' State Insurance Corporation, Chandigarh v. Gurdial
Singh and Ors., (1991] Supp 1SCC204 a three-Judge Bench of this Court was
considering the liability flowing from Section 2(17) of the Employees State
Insurance Act, 1948 (in short the 'ES! Act'). This Court held as follows:
B
"This appeal by special leave is directed against the judgment of the
High Court of Punjab & Haryana affirming the decision of the single
Judge in a writ petition. The short question that came before the High
Court for consideration was whether the Directors of a private limited
company had personal liability to meet the demand of contribution
arising under the Employees' State Insurance Act, 1948. Their liability C
depended upon the correct interpretation of the term 'principal
employer' appearing in S. 2(17) of the Act. The definition reads thus:

"2(17) 'Principal employer' means;

(i) in a factory, the owner or occupier and includes the managing D
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 (63of1948), the person
so named;

(ii) in any establishment under the control of any department of any E
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." F
2. There is no dispute that clause (ii) does not apply. What is relevant
to consider is whether the liability of Directors is covered under
clause (i) and if it is, clause (iii) being residuary would not apply and
in case it is not covered by clause (i), the matter would be regulated
by clause (iii). Admittedly the company had a factory and it is not in G
dispute that the occupier of the factory had been duly named. It is
also not in dispute that it had a manager too. In view of the clear terms
in the definition, we are of the view that Directors did not come within .
clau~e (i), but the occupier being there, clause (i) applied and in that

H
' '

532 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A view of the matter, clause (iii) could have no application.

Though the position is slightly different in the Factories Act in view of
the amendment as noted in J.K. Industries case (supra), the view regarding
the personal liability of the Directors is clearly applicable.

B It is trite law that liability of a person is dependent upon the statutory
prescriptions governing such liability. Sections 5 and 291 of the Companies
Act, 1956 (in short 'Companies Act') are to be noted in this regard. Section
5 refers to officer who is in default. Section 291 on the other hand relates to
general powers of the Board of Directors. In order to attract the liability under
the Act, it has to be seen as to on whom the Act fixes the liability. Section
C 3 speaks of the responsibility for payment of wages. It speaks of the "employer"
which expression is defined in Section 2(ia). Section 15 refers to the claims
arising out of deductions from wages or delaying payment of wages and
penalty for malicious or vexatious claims. Statutorily no liability has been fixed
on the Directors.
D
Under Section 3 of the Act as amended by the M.P. Amendment, the
liability is cast on a person who has been named as Manager of the Factory
and the employer jointly. Therefore, in order to find out whether the Director
had a responsibility for making payment, two different things have to be
established: (i) he was the employer or (ii) he was a person who has been
E named as Manager of the factory. In the instant case, there is no such
allegation or evidence led.

Considering a case under the 'ESI Act' and certain provisions of the
Indian Penal Code, 1860 (in short the 'IPC'), this Court in Employees State
Insurance Corporationv. S.K. Aggrawal and Ors., [1998] 6 SCC 288 observed
F as follows:

"4. Sec. 2(17) of the Employees' State Insurance Act, however, defines
the principal employer as either owner or occupier - taking care of all
ev~ntualities. When the owner of the factory is the principal employer,
there is no need to examine who is occupier. The owner will be the
G principal employer under S. 40.

5. The Employees' State Insurance Act does not define the term
"employer" although under Sections 858 and 85C of that Act the term
"employer" is used.

H
P.C.AGGARWALAv.PAYMENTOFWAGESINSPECTOR,M.P[PASAYAT,J.] 533

10. Therefore, even if we read the definition of "principal employer" A
under the Employees' State Insurance Act, 1948 in Explanation 2 to
S. 405 of the Indian Penal Code, the directors of the company, in the
present case, would not be covered by the definition of "principal
employer" when the company itself owns the factory and is also the
employer of its employees at the head office."
B
In Tata Engineering and Locomotive Company Ltd v. State of Bihar
and Ors., [1964] 6 SCR 885 the basic features of a Company, its corporate
existence and its position vis-a-vis shareholders was highlighted as follows:

"The true legal position in regard to the character of a corporation or
a company which owes its incorporation to a statutory authority is C
not in doubt or dispute. The corporation in law is equal to a natural
person and has a legal entity of its own. The entity of the corporation
is entirely separate from that of its shareholders; it bears its own name
and has a seal of its own; its assets are separate and distinct from
those of its members; it can sue and be sued exclusively for its own D
purpose; its creditors cannot obtain satisfaction from the assets of its
· members; the liability of the members or shareholders is limited to the
capital invested by them; similarly, the creditors of the members have
no right to the assets of the corporation. This position has been well-
established ever since the decision in the case of Salomon v. Salomon
& Co., (1897) A.C. 22, H.L. was pronounced in 1897; and indeed, it E
has always been the well-recognised principle of common law. However,
in the course of time, the doctrine that the corporation or a company
has a legal and separate entity of its own has been subjected to
certain exceptions by the application of the fiction that the veil of the
corporation can be lifted and its face examined in substance. The F
doctrine of the lifting of the veil thus marks a change in the attitude
that law had originally adopted towards the concept of the separate
entity or personality of the corporation. As a result of the impact of
the complexity of economic factors, judicial decisions have sometimes
recognised exceptions to the rule about the juristic personality of the
corporation. It may be that in course of time these exceptions may G
grow in number and to meet the requirements of different economic
problems, the theory about the personality of the corporation may be
confined more and more."

The doctrine of lifting of the veil has been applied, in the words of
H
534 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A Palmer, in five categories of cases: where companies are in relationship of
holding aad subsidiary (or sub-subsidiary) companies; where a shareholder
has lost the privilege of limited liability and has become directly liable to
certain creditors of the company on the ground that, with his knowledge, the
company continued to carry on business six months after the number of its
B members was reduced below the legal minimum; in certain matters pertaining
to the law of taxes, death duty and stamps, particularly where the question
of the "controlling interest" is in issue; in the law relating to exchange control,
and in the law relating to trading with the enemy where the test of control
is adopted (Palmer's Company Law, 20th Edn., page 136, now page 215, 24th
Edn. 1987). In some of these cases judicial decisions have no doubt lifted the
C veil and consider the substance of the matter.

Gower has similarly summarized this position with observation that in
a number of important respects, the legislature has rent the veil woven by the
Salomon case. Particularly is this so, -says Gower, in the sphere of taxation
and in the steps which have been taken towards the recognition of the
D enterprise - entity rather than corporate entity. It is significant, however, that
according to Gower the Courts only have construed statutes as "cracking
open the corporate shell" when compelled to do so by the clear words of the
statute - indeed they have gone out of their way to avoid this construction
whenever possible. Thus, at present the judicial approach in cracking open
E the corporate shell is somewhat cautious and circumspect. It is only when the
legislative provision justifies the adoption of such a course that the veil has
been lifted. In exceptional cases where courts have felt "themselves able to
ignore the corporate entity and to treat the individual shareholder as liable
for its acts" the same course has been adopted. Summarizing his conclusions,
Gower has classified seven categories of cases where the veil of corporate
F body has been lifted. But it would not be possible to evolve a rational
consistent and inflexible principle which can be invoked in determining the
question as to whether the veil of the corporation should be lifted or not.
Broadly, where fraud is intended to be prevented, or trading with enemy is
sought to be defeated, the veil of corporation is lifted by judicial decision and
G the shareholders are held to be "persons who actually work for corporation".

According to J.K. Industries, case (supra) only a Director can be
nominated as occupier arid not simply an officer or employee. This Court
observed this to be the result of the 1987 amendment of the Factories Act.
The discretion of inspector of factories as to occupier can be exercised only
H where no director is identified or nominated as an occupier. The decision of
P.C.AGGARWALAv..PAYMENTOFWAGESlNSPECTOR,M.P.[PASAYAT,J.] 535
this Court to the effect that only a director of the Company can be appointed A
as an occupier of the factory, has been, on the facts of the particular case
distinguished by this Court in Indian Oil Corpn. Ltd. v. Chief Inspector of
Factories, AIR (1998) SC 2456. This Court held that in the case of the
appellant-corporation it will have to be held that the ultimate control over the
. affairs of all the factories of the Corporation is really of the Central Government B
and, therefore, all the factories of the Corporation should be regarded as
factories owned and controlled by the Central Government. As there is a
special provision governing factories owned and controlled by the Central
Government, the general principle applicable to non-Government companies
was held to be not applicable.

As the High Court has proceeded to hold the Directors liable by
c
introducing the expression "occupier", which expression is used in the Factories
Act and not in the Act, the basic premises on which the High Court proceeded
are clearly untenable. Therefore, on a plain reading of the l:mguage of the
governing statute, it cannot be held that the Directors had any personal
liability. The judgments of the High Court are therefore not sustainable and D
are set aside. In view of the aforesaid conclusion, the appeals filed by the
functionaries under the Act lack merits. However, it shall be in the interest
of employees if the properties of the Company which are stated to be under
the control of Official Liquidator are disposed of early so that the employees
can be paid whatever is legally payable to them. Similarly the other creditors E
can be paid and the liability can be discharged.

The appeals filed by the Directors are allowed and the appeals filed by
the functionaries under the Act and the State are dismissed. There shall be
no order as to costs.

vs Appeal allowed.