M/S QUILON DISTRICT AUTOMOBILE WORKERS CO-OPERATIVE SOCIETY LTD. v. THE REGIONAL DIRECTOR, EMPLOYEES' STATE INSURANCE CORPORATION

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.T.RAVIKUMAR & THE HONOURABLE MRS. JUSTICE MARY JOSEPH TUESDAY, THE 23RD DAY OF FEBRUARY 2016/4TH PHALGUNA, 1937 Ins.APP.No. 21 of 2010 ( ) --------------------------AGAINST THE JUDGMENT IN I.C.No.30/2005 of EMPLOYEES' INSURANCE COURT, KOLLAM DATED 17-07-2009 APPELLANT/APPLICANT: -------------------------- M/S.QUILON DISTRICT AUTOMOBILE WORKERS CO-OPERATIVE SOCIETY LTD., KADAMPANADU P.O., ADOOR, PATHANAMTHITTA DISTRICT, REPRESENTED BY ITS SECRETARY. BY ADVS.SRI. K.SIJU SRI.PRATHEESH.P SRI.S.SUDHEESHKAR RESPONDENT/OPPOSITE PARTY: ----------------------------------- THE REGIONAL DIRECTOR, EMPLOYEES STATE INSURANCE CORPORATION, PANCHADWEEP BHAVAN, NORTH SWARAJ ROUND, TRICHUR. R1 BY ADV. SMT.T.D.RAJALAKSHMY, SC, ESI CORPN. BY ADV. SRI.THOMAS MATHEW NELLIMOOTTIL THIS INSURANCE APPEAL HAVING BEEN FINALLY HEARD ON 23-02-2016, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: **“C.R.”** **C.T.RAVIKUMAR & MARY JOSEPH, JJ. == == == == == == == == == == Insurance Appeal No.21 of 2010 == == == == == == == == == == == Dated this the 23[rd] day of February, 2016** ## **J U D G M E N T** ## C.T.RAVIKUMAR, J. The applicant before the Employees Insurance Court, Kollam in I.C.No.30/2005 is the appellant herein. The appellant is a Co-Operative Society, registered under the provisions of the Kerala Co-Operative Societies Act and it is engaged in conducting the operation of private bus services with 70 workers. It was registered in the year 1980 and the Society virtually came to a standstill during the period 1997 to 2003. As the Society was in the red, it could not remit the contributions towards the compensation payable under the Employees State Insurance Act duly and promptly during the said period. Later, the employees took over the management and they had cleared all the defaulted contribution amount in instalments from 06.04.2000 to 21.11.2004. Thereafter, invoking the power under Section 85B of the Employees' State Insurance Act, 1948 (for brevity 'the Act' only) the Regional Director, Kerala, issued notice dated 15.02.2005 calling upon the appellant upon to show cause why damages as envisaged under 2 Insurance Appeal No.21 of 2010 Section 85B of the Act should not be levied and recovered from the appellant. Admittedly, none representing the Society appeared before the competent authority despite the receipt of the said notice and in the said circumstances, Annexure-I order was passed. As per Annexure-I order dated 31.03.2005, an amount of `1,13,557/- was levied as damages, evidently, invoking the power under Section 85B of the Act. The appellant thereupon, approached Employees' Insurance Court by filing Insurance Case No.30/2005 challenging Annexure-I order. However, the Insurance Court as per the judgment dated 17.07.2009 dismissed the application. It is in the said circumstances, this appeal has been preferred. 2. We have heard the learned counsel for the appellant and the learned counsel appearing for the respondent. 3. The learned counsel for the appellant contended that though the appellant failed to appear before the competent authority pursuant to the receipt of notice dated 15.02.2005 or to show cause as to why damages should not be levied and recovered the competent authority was bound to consider the question whether it was inevitable to levy damages for the delayed payment of the contribution and if at 3 Insurance Appeal No.21 of 2010 all, it is to be levied whether it should be levied at the maximum rate prescribed under Regulation 31(C) of the Employees' State Insurance (General) Regulations 1950 (for short, 'the Regulations'). It is further contended that going by the provisions under the statute and the interpretation given by this court in the decision in **E.S.I. Corporation** v. **Moosankutty [2005 (4) KLT SN 84]** the failure of the employer concerned to appear and show cause cannot be the reason for levying the maximum damages. The nub of the contention made relying on the said decision and the provisions of law is that under the Act the authority competent is under an obligation to apply the mind while deciding the question whether the damages should be levied invoking the power under Section 85B of the Act and even while ordering for its levy whether the maximum damages need to be imposed. 4. It is contended on behalf of the appellant that a perusal of Annexure-I order would reveal that such aspects were not considered at all in the real perspective by the respondent while passing the same. The learned counsel further contended that before the Insurance Court, the appellant virtually disclosed all the reasons for the delayed payment and in such circumstances, in the light of the provisions under Section 4 Insurance Appeal No.21 of 2010 75(1)(g), the Insurance Court ought to have taken into account such aspects while deciding the sustainability or otherwise of Annexure-I order. Furthermore, it is contended that in the application filed before the Insurance Court the fact that the delay in payment had occurred solely due to the financial crisis and the reason therefor, were specifically pleaded. The fact that, immediately after the management was taken over by the employees, they had cleared the entire arrears in contribution was also highlighted. In such circumstances, the Insurance Court ought to have invoked the power under Section 75(1) (g) and interfered with Annexure-I order, is the main thrust of the contention. To buttress the said contention the learned counsel relied on the decision of a Division Bench of this Court in **E.S.I. Corporation** v. **Premanandan** reported in **2007 (2) KLT 666** . In the said decision, it was held by this court that the Insurance Court has jurisdiction to decide the question as to whether the damages imposed under Section 85(B) of the Act is justifiable or not. In the said circumstances and also in the light of the decisions referred supra, the learned counsel contended that the order under appeal invites interference. According to the learned counsel, in view of the factual background obtained in this case the Insurance Court ought to have found that the case on hand is not one, where maximum damages was 5 Insurance Appeal No.21 of 2010 leviable on a true and legal application of the enabling provision. The Employees Insurance Court ought to have appreciated the financial position of the society and also found that the order, if allowed to stand, would annihilate the very existence of the society, it is lastly contended. 5. _Per contra,_ the learned counsel appearing for the respondent contended that the appellant is not justified in raising such contentions to mount challenge against Annexures I and II especially when the appellant did not have a case that notice dated 15.02.2005 issued under Section 85(B) of the Act was not received by the appellant and when, it is a case where admittedly the appellant had failed to appear before the authority before passing of Annexure-I order. It is submitted that it is a case where despite the receipt of such notice for reasons best known to the appellant the appellant refrained from showing cause and also appearing before the competent authority and to explain the delay and the reason for non-appearance is not forthcoming even now. In such circumstances, it is contended that the appellant cannot canvass the position that the competent authority did not apply its mind while passing Annexure-I order. In short, according to the learned counsel for the respondent, Annexure-I is perfectly legal and in order and the appeal is liable to be dismissed. 6 Insurance Appeal No.21 of 2010 6. While appreciating the rival contentions in the wake of the provisions of law and enunciation of law on the relevant issues certain aspects have to be borne in mind. It is worthwhile to extract Section 85B of the Act as also Regulation 31(C) of the Regulations. They read thus:- “ **85B. Power to recover damages.** - (1) Where an employer fails to pay the amount due in respect of any contribution or any other amount payable under this Act, the Corporation may recover from the employer by way of penalty such damages not exceeding the amount of arrears as may be specified in the regulations. Provided that before recovering such damages, the employer shall be given a reasonable opportunity of being heard: Provided further that the Corporation may reduce or waive the damages recoverable under this section in relation to an establishment which is a sick industrial company in respect of which a scheme for rehabilitation has been sanctioned by the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), subject to such terms and conditions as may be specified in regulations. (2) Any damages recoverable under subsection (1) may be recovered as an arrear of land revenue or under section 45C to section 45-I.” 7 Insurance Appeal No.21 of 2010 **31C. Damages or contributions or any other amount due, but not paid in time** .- If an employer fails to pay contributions within the periods specified under regulation 31, or any other amount payable under the Act, the corporation may recover damages, not exceeding the rates mentioned below, by way of penalty: |<br>by way of penalty:|| |---|---| |**_Period of Delay_**|**_Maximum rate of damages in per cent._**<br>**_per annum of the amount due_**| |**_(i) Less than 2 months_**<br>**_(ii) 2 months and above but_**<br>**_less than 4 months_**<br>**_(iii) 4 months and above but_**<br>**_less than 6 months_**<br>**_(iv) 6 months and above_**|**_5%_**<br>**_10%_**<br>**_15%_**<br>**_25%_**| Provided that the Corporation, in relation to a factory or establishment which is declared as sick industrial company and in respect of which a rehabilitation scheme has been sanctioned by the Board for Industrial and Financial Reconstruction, may:- (a) in case of a change of management including transfer of undertaking(s) to workers' Co-operatives (s) or in case of merger or amalgamation of sick industrial company with a healthy company, completely waive the damages levied or leviable; (b) in other cases, depending on its merits, waive upto 5 percent damages levied or leviable; (c) in exceptional hard cases, waive either totally or partially the damages levied or leviable.” 7. What is permissible to be recovered in terms of 8 Insurance Appeal No.21 of 2010 Regulation 31(C) of the Regulations is not only the damages or contributions but also any other amount due, by way of penalty. A perusal of Section 85B of the Act, as amended by Act 29 of 1989 with effect from 01.01.1992, would make it clear that the authority competent may recover damages by way of penalty. In other words, the said provision confers discretion on the Corporation either to recover the damages or not to recover the damages, by way of penalty. In such circumstances explicitly revealed from the aforesaid provisions, and especially, in the light of the decisions in **Moosankutty's** case and **Premanandan's** case (supra) the authority competent though empowered to levy damages it could impose damages only in accordance with the principles applicable for imposing penalty for failure to carry out the statutory obligation to pay contributions. There can be no doubt that 'damages' and 'penalty' are different and distinct. When a statute enjoins a person to do a particular thing and when he fails to do so, he becomes liable to be penalised, in other words, to be imposed with penalty therefor. Thus, penalty is a liability composed as a punishment on the party committing the violation. On the other hand, 'damages' means the sum recoverable as amends for the wrong by a process of law and thus, it is compensation for legal injury. When, by bringing amendment to Section 85B of the Act, it was made as a 9 Insurance Appeal No.21 of 2010 recovery by way of penalty, it could not be adjudged as leviable merely because of the belated payment of contribution. Since the element of penal measure crept in, merely because specified maximum rates are mentioned, it cannot be said that depending upon the period of delay 'damages' has invariably to be levied at the specified maximum rates, at all circumstances without considering the question whether the maximum is to be levied. Above all, it is to be noted that the very expression 'may recover' would undoubtedly reveal the existence of legal discretion to consider even the question whether 'damages' need be levied, in a given circumstance. In view of the enunciation of law revealed from the decisions referred, by both sides, it can be seen that the position is that application of mind to the reasons, situations and circumstances that led to the delayed payment are to be considered, before passing the order invoking the power. Had it been not so what is the purpose and object of giving show cause notice prior to the passing of the order. Virtually, offering of opportunity by issuing show cause notice, in terms of its proviso, is intended to enable the authority concerned to have such reasons, situations and circumstances and then to make an evaluation in accordance with law and in compliance with the principles of natural justice. It would also make it clear that the defaultee employer is also having the obligation to furnish them for the 10 Insurance Appeal No.21 of 2010 consideration of the authority concerned. We may also hasten to add that if such reasons or situations are discernible from any record or in any manner, while discharging the statutory obligation in accordance with the principles applicable to impose penalty, it has to apply its mind on such reasons or situations to decide, firstly, whether 'damages' is to be levied and if decided to levy, at what rate it should be levied, in view of such reasons or situations. In the decision in **Employees' State Insurance Corporation** v. **H.M.T. Ltd.** reported in **(2008) 3 SCC 35** the Hon'ble Apex Court held:- “Existence of _mens rea_ or _actus reus_ to contravene a statutory provision must also be held to be a necessary ingredient for levy of damages and the quantum thereof.” 8. In view of the above referred decisions and provisions, we are of the considered view that 'justifiability' of imposition of damages by way of penalty, is justiciable, on various grounds including non- application of mind. The Hon'ble Apex Court in **South Indian Flour Mills P. Ltd.** v. **The Regional Provident Fund Commissioner** reported in **(1978) Lab IC 1187** held:- 11 Insurance Appeal No.21 of 2010 “No doubt, the liability to contribute might be statutory, but nevertheless, merely because there was delay or merely because there was a belated payment, it would not follow automatically that the liability for damages got attached. It was rendered in relation to the scope of power, under Section 14B, to recover damages, under the Employees' Provident Fund Act, 1952.” Going by the decision, exercise of any such power should not be a mere arithmetical computation or a rigid application of law by which damages could be recovered and therefore, there must be an application of mind and there must be an examination of merits of individual case. 9. Having held as above, we will proceed to consider the sustainability of Annexures-I and II. In this case, evidently, the competent authority as per Annexure-I imposed the maximum damages that could be imposed under Regulation 31(C) against the appellant. While passing an order under Section 85(B)of the Act, taking into account the guidelines under Regulation 31(C) of the Regulations, the authority competent has to arrive at a conclusion as to whether the delayed payment was deliberate or whether there is any defiance of law or the action is continuous or not. In the contextual situation, it is apposite to refer to a contention taken up by the learned counsel for 12 Insurance Appeal No.21 of 2010 the appellant. It is submitted that though a written statement has been filed by the respondent herein before the Insurance Court in Insurance Case No.30/05 the respondent did not seriously challenge the contention of the appellant herein that the delay in effecting payment of contribution was not deliberate and it had virtually occurred owing to the poor financial situation of the appellant society. It is also to be noted that arrears in contribution was subsequently cleared after the employees took over the management of the society. It is contended by the learned counsel that the circumstances that resulted in delayed payment have been elaborately explained in the application filed before the Insurance Court and in such circumstances, the non-raising of any objection against the said reason, ought to have been taken by the Insurance Court while passing the impugned order. In other words, according to the learned counsel, the Insurance Court ought to have taken that there was no deliberate failure to effect the payment promptly from the part of the appellant. Even while appreciating the aforesaid contention, we feel that the appellant is conveniently ignoring its own lapse to avail the opportunity offered by the authority concerned and the consequential failure to show cause for the delay. A defaultee employer cannot legally entitled to raise grievances and at any rate, accuse the authority raising non-application of mind on 13 Insurance Appeal No.21 of 2010 reasons, situations resulted in delayed payment entailing the liability to pay damages if he had not availed the opportunity offered by the authority concerned by issuing notice in terms of the proviso to Section 85(B) of the Act. This is because to raise such a ground and attribute flaw on the authority such reasons, situations or circumstances ought to be placed before that authority. Non-raising of such contentions appropriately at the appropriate time is the reason for nonconsideration. We have already held, referring to **Moosankutty's** case (supra) that the failure for appearance and showing cause by the defaultee by itself cannot be a reason for levying the maximum damages by way of penalty. The decisions of the Hon'ble Apex Court in **H.M.T. Ltd.'s** case and **South Indian Flour Mills P. Ltd.'s** case (supra) would reveal that the mere delay in making the statutory contribution or belated payment ought not to have been the sole reason for imposing damages and at any rate, at the maximum rate. In short, even in the absence of the defaultee or an explanation of cause for the delay or belated payment the authority concerned got a bounden duty to apply its mind to the circumstances and situations obtained. If any reason or situation is discernible from the materials on record the authority has to bestow consideration on such reason or situation as imposition of damages is by way of penalty. In the light of the decision 14 Insurance Appeal No.21 of 2010 in **Premanandan's** case (supra) there can be no doubt that the question as to whether the damages imposed under Section 85B is justifiable or whether the quantum of damages imposed is in accordance with the principles for computing the damages is a dispute, which would fall within the ambit of clause (g) of Section 75(1) of the Act. It was held therein that the Insurance Court has jurisdiction to decide those questions. 10. We will now consider the position whether the Insurance Court had failed in its exercise of jurisdiction under Section 75(1)(g) of the Act, especially in the light of the decision in **Premanandan's** case (supra). But, that by itself, may not be taken as a ground to reject a proper explanation coming even at a later stage while mounting challenge against such an order. We have no hesitation to hold that when financial constraints of a society that too, whose management was taken over by the employees, was assigned as a reason for delayed payment and when such reason is found or can be found, as not a ruse to escape the liability it will always be just and proper to take a decision whether the delay was purposeful and also on the question whether imposition of damages is conducive for continuance of such a society/ company and whether imposition of penalty would act as a catalyst for 15 Insurance Appeal No.21 of 2010 its collapse. In this case, the management of the society in red was taken over by the employees and evidently, after taking over the management the arrears in contribution were cleared. Having considered the rival contentions and after perusing the impugned judgment with reference to the provisions under Section 85B of the Act and guidelines under Regulation 31(C) and the decisions and our conclusions, as mentioned above, we are of the view that in the case on hand there existed no circumstances warranting imposition of the maximum damages that could be levied under Regulation 31(C) though on account of the appellant's failure to respond at the appropriate time in the proper manner we negate the prayer for complete exoneration from paying the damages levied. We have already found, though the circumstances were explained by the appellant before the Insurance Court in I.C.No.30/2005 the respondent had not seriously disputed such contentions. The materials on record would not indicate the _mens rea_ on the part of the appellant to contravene the statutory provision. Taking into account all such aspects and also the fact that the society indulge in the operation of bus service is being managed by the workers themselves we are of the view that the amount fixed by way of penalty invoking Section 85B of the Act as per Annexure-I, which was confirmed under Annexure-II judgment invites interference especially 16 Insurance Appeal No.21 of 2010 taking note of the fact that the appellant had cleared arrears in contribution occurred due to default in payment. At this distance of time, we do not think it proper or in the interest of justice, to remand the matter. Taking into account all such aspects, we fix 25,000/- as₹ the appropriate damages payable by the appellant under Section 85(B) of the Act. The impugned orders viz., Annexure-I dated 30.3.2005 of the Employees' State Insurance Corporation and Annexure-II judgment of the Employees' Insurance Court, stand modified accordingly. The appellant shall pay the said amount of 25,000/- within a period of one₹ month from the date of receipt of a copy of this judgment. This appeal is allowed as above. There will be no order as to costs. Sd/- **C.T.RAVIKUMAR JUDGE** Sd/- **MARY JOSEPH** **JUDGE** skr