Justice Ahsanuddin Amanullah’s Ruling Strengthens Accountability in ESIC Compliance: Ajay Raj Shetty vs. Director & Anr

The ruling that was handed down by Justice Ahsanuddin Amanullah and Justice Sudhanshu Dhulia on April 17, 2025, in the case of Ajay Raj Shetty vs. Director & Anr, provides essential clarity on the responsibility of Principal Employers in accordance with the Employees’ State Insurance Act, 1948 (also known as the ESIC Act).

The case featured a sick firm that failed to submit employee payments to the Employees’ State Insurance Corporation (ESI). The employee of the sick company, Ajay Raj Shetty, argued that he was wrongfully accused of being the Principal Employer.

Despite the fact that certain businesses are experiencing financial difficulties, the decision of the Court strengthens the responsibility of those who have supervisory responsibilities in order to guarantee compliance with statutory welfare requirements.

Details on the situation

M/s Electriex (India) Limited, the firm that is the subject of this investigation, was deemed to be a sick industry by the Board for Industrial and Financial Reconstruction (BIFR) in the year 2001. Throughout the years, several legal processes concerning the administration and operations of the firm were initiated as the corporation continued to experience financial difficulties.

The workers’ State Insurance Corporation (ESIC) made the discovery in 2010 that despite the fact that contributions of Rs. 8,26,696 had been withdrawn from the pay of workers between February and December of that same year, the same amount had not been deposited with ESIC.

The outcome of this was that a complaint was lodged against the firm and its employee, Ajay Raj Shetty, who was identified in the records of the ESIC as the General Manager and Principal Employer of the company.

The Trial Court found Shetty guilty of violating Section 85 of the ESIC Act and granted him a sentence of imprisonment for a period of six months and a fine of five thousand rupees. Additionally, the conviction was affirmed by the High Court of Karnataka after it was first upheld by the Appellate Court.

On appeal, the issue was brought to the Supreme Court, notwithstanding the fact that Shetty had since paid the ESIC dues and asserted that he was just a Technical Coordinator.

Legal Provisions That Are Employed

At the heart of the matter was the interpretation and execution of Section 85 of the Employees’ State Insurance Corporation Act (ESI Act), which imposes penalties for employees who fail to pay their contributions.

The term “Principal Employer” is defined under Section 2(17) of the Act, which extends the obligation beyond the owner or occupier of a factory to include anybody who is responsible for the supervision and control of an enterprise.

Regulation 31C of the ESIC Regulations is another major element. This clause enables the ESIC to reclaim outstanding payments with penalties, providing some degree of flexibility in situations involving ill firms. The individual who filed the appeal contended that a civil remedy of this kind ought to have been given precedence over criminal prosecution.

Propositions of the Appellant

The legal representative for Ajay Raj Shetty contended that his client was only hired to the position of Technical Coordinator in 2009, by which time the firm had already been declared ill. His salary was not paid, and he was never presented with an official letter of employment by the company.

Due to the fact that the officer who created the ESIC report was not questioned in court, the report that mentioned him as the Principal Employer was not credible. He was not the Principal Employer.

The individual who filed the appeal said that there was no evidence to support his claim that he personally withheld employee contributions or failed to deposit them. The counter-affidavit submitted by the corporation recognized that Mr. Ajit Hegde, who was not only a promoter but also the genuine Principal Employer, existed.

During the time that the case was being processed, Shetty decided to voluntarily pay up the ESIC dues that were still overdue.

Finally, Shetty made a plea that, in the event that the verdict was maintained, his sentence be reduced to the term that he had already served. He cited previous decisions made by the Supreme Court that favored mercy in instances involving ill firms and technical infractions of economic regulations.

The Arguments of the Respondent

There were many courts that had found sufficient evidence to condemn the appellant, and the attorney for ESIC stressed this fact. According to the paperwork of the corporation as well as the records of the ESIC, he was the General Manager.

It was not possible for him to offer any proof that contradicted his claims, such as pay stubs or a letter of appointment that expressly said differently.

The legal representative referred to a ruling made by the Madras High Court, which said that criminal culpability may still be prosecuted even if a firm was declared sick in accordance with the Sick Industrial Companies (Special Provisions) Act, 1986, which has since been repealed.

Furthermore, the High Court had previously shown compassion by convicting Shetty under Section 85(i)(b), which carried a lower term, instead than the more severe Section 85(i)(a), applicable where employee contributions deducted but not paid are involved.

The reasoning and analysis made by the Supreme Court

The Supreme Court conducted a thorough review of the legislative definitions as well as the record of actions from the subordinate courts.

It was pointed out that Section 2(17) of the ESIC Act clearly includes within its scope any individual who is responsible for the supervision and control of the establishment, regardless of the legal designation that they have.

Under the Act, a managing agent or de facto management may also be held accountable for the actions of the company.

The court came to the conclusion that the appellant, who was opposing the designation of General Manager, had failed to offer solid information that disproved this function or identified who else was the Principal Employer throughout the relevant period of time.

In this particular scenario, the responsibility for providing evidence remained with Shetty after the documented records indicated that he was the one accountable.

Importantly, the Court differentiated between the precedents that were mentioned by the appellant. It made the observation that rulings that interpreted responsibility under the Factories Act could not be mechanically transferred to the ESIC Act, which has its unique provisions that are geared to ensure compliance with employee welfare duties.

Furthermore, the Court emphasized that Section 85 of the ESIC Act allows for strict accountability, acknowledging that delays in depositing contributions that have been taken from an employee’s paycheck are detrimental to the employee’s capacity to receive essential social security benefits.

The court did not grant the plea for mercy and instead decided not to tamper with the punishment that was handed down. It was pointed out that the Trial Court had already imposed the lowest penalty that was permissible under Section 85(i)(b), and there was no justification for further reducing the sentence to nominal imprisonment.

Resolving the Most Important Concerns

A number of fundamental concepts are reaffirmed by the judgment:

To begin, statutory welfare duties, such as payments to the Employees’ State Insurance Corporation (ESI), cannot be undercut by the status of an employer’s finances or by disagreements about job descriptions. It is possible to hold accountable those individuals who really exercise oversight and control.

Secondly, after the contributions from the employees have been deducted, they must be submitted with ESIC as soon as possible. Should you fail to comply, you will be subject to both civil liabilities and criminal punishment.

Furthermore, according to Section 85, the simple act of paying dues after the commencement of criminal proceedings does not exonerate the offender from any responsibility for the offense. Compliance must be prospective and ongoing; it cannot be corrective after litigation has already begun.

The Supreme Court, in its final decision, made it clear that corporate and industrial legislation, such as the Sick Industrial Companies Act or the Factories Act, cannot be used as a means of protecting oneself from legal responsibility under the ESIC Act. Before all else, the goals of guaranteeing the timely wellbeing of employees should be prioritized.

Regarding the responsibility of individuals in control of corporations in accordance with welfare regulations, the decision that the Supreme Court made in the case of Ajay Raj Shetty vs. Director & Anr constitutes a powerful declaration.

This highlights the fact that the rights of employees to social security cannot be compromised by disagreements between managers or hardship in the financial sector. In addition, the ruling emphasizes the need of employers and their agents demonstrating accurate documentation and taking proactive measures to comply with regulations.

This judgement will serve as an important precedent in the ever-changing industrial environment, which is characterized by frequent management shifts and corporate restructuring. It will ensure that employee welfare contributions are addressed with the highest seriousness, which is a crucial aspect of corporate restructuring.