N Sridhar v. State of Telangana and Anr.

What happened

The prosecution arose from a complaint dated 5 March 2015 by the Enforcement Officer alleging that Sankhya Infotech Limited had defaulted in remitting EPF contributions for March 2013 to December 2014. The petitioner, described as Chairman and Managing Director, was the sole accused in C.C. No. 321 of 2016 for offences under section 406 IPC and section 14 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, and the company had not been arrayed. He said he was not an employer under section 2(e), the dues had been cleared, the company had undergone insolvency resolution with an approved resolution plan, and there was no inspection report. The EPFO and the Public Prosecutor said contributions had been deducted from wages and not paid, constituting misappropriation, and admitted the dues had since been cleared and that the company and its successors had not been made accused.

Questions before the court

• Can the Chairman and Managing Director be prosecuted for the company's EPF default on the strength of his designation alone, without the company as an accused?

Why the court ruled this way

Criminal breach of trust requires entrustment and dishonest misappropriation, and the penal provision of the EPF Act presupposes determination of dues through the statutory scheme under sections 7A and 13 (paragraph 8). The High Court's inherent power is to be used sparingly to prevent abuse of process (paragraph 9). The company, the principal offender, was not an accused, and in corporate offences its prosecution is ordinarily a necessary step for fastening vicarious liability on officers (paragraph 10). Section 14A(2) of the EPF Act is similar to section 141 of the Negotiable Instruments Act, and vicarious liability arises only on specific averments and supporting material of the individual's role (paragraph 11). There was no material that the petitioner was in charge of day-to-day affairs, and designation alone is impermissible (paragraph 12). There was no entrustment or dishonest misappropriation, and mere non-payment without mens rea is not an offence under section 406 (paragraph 13). Due process determination under sections 7A and 13 had not been shown (paragraph 14), the charge sheet lacked admissible material (paragraph 15), and insolvency resolution and settlement of dues further weakened the prosecution (paragraph 16).

Controlling point

The case fell within the categories in State of Haryana v. Bhajan Lal and continuing the proceedings would be an abuse of process.

Order and next steps

The petition was allowed and the proceedings against the petitioner in C.C. No. 321 of 2016 were quashed. Pending miscellaneous applications stood closed.

Practical implications

A director or managing director prosecuted for the company's EPF default should check whether the company has been arraigned, whether dues were determined under sections 7A and 13, and whether the complaint alleges his specific role in day-to-day conduct, and rely on Bhajan Lal if it does not.

Limits of this ruling

• The result rests on the absence of the company as an accused, of specific averments and of a statutory determination of dues; where those exist, the prosecution of an officer in charge may proceed.