1. Introduction

In Ajay Raj Shetty v. Director & Anr. (2025 INSC 500) the Supreme Court of India confronted the chronically litigated question of who can be criminally prosecuted as “principal employer” when employee contributions deducted under the Employees’ State Insurance Act, 1948 (“ESI Act”) are not deposited with the Employees’ State Insurance Corporation (“ESIC”). The appellant, Ajay Raj Shetty, contended that he was merely a “Technical Coordinator” of a financially distressed company (M/s Electriex (I) Ltd.) and could not be saddled with the stringent liabilities prescribed by Section 85 of the Act. The Court’s dismissal of his appeal crystallises two key principles:

1. Substantive principle (“Shetty Doctrine”): A person who, de facto, performs supervisory and managerial functions—irrespective of formal designation—falls within the extended limb of “principal employer” in Section 2(17)(iii) of the ESI Act.
2. Sentencing principle: Courts possess no discretion to reduce the statutorily fixed minimum fine of ₹5,000 prescribed by Section 85(i)(a)/(b); discretion is confined only to lowering the term of imprisonment in suitable cases.

The decision therefore tightens compliance expectations on corporate functionaries and simultaneously clarifies the contours of judicial discretion in sentencing under the ESI Act.

2. Summary of the Judgment

• The appellant’s conviction by the Trial Court (six‑month imprisonment + ₹5,000 fine) for offence under Section 85(i)(b) ESI Act was successively upheld by the First Appellate Court and the High Court of Karnataka.
• He argued before the Supreme Court that:
  (a) he was not “principal employer”;
  (b) the prosecution evidence (ESIC inspection report) was inadmissible; and
  (c) ESIC should have opted for civil recovery because the company was certified “sick”.
• The Supreme Court rejected all contentions, reasoning that:
  • Company records described him as General Manager;
  • He exercised supervisory control, squarely fitting Section 2(17);
  • Liability under the ESI Act can coexist with BIFR/SICA proceedings; and
  • A lower sentence had already been imposed; no further leniency was warranted.
• The appeal was dismissed; the appellant must surrender within two weeks with sentence credit for any period already undergone.

3. Analysis

3.1 Precedents Cited

1. Employees’ State Insurance Corpn., Chandigarh v. Gurdial Singh (AIR 1991 SC 1741)
   – Held that when an “occupier” (under Section 2(17)(i)) is identified, directors cannot automatically be prosecuted under the residuary clause. The Supreme Court distinguished this case, noting that Ajay Raj Shetty was, in substance, the managing agent in control, not a mere director.
2. J. K. Industries Ltd. v. Chief Inspector of Factories & Boilers (1996 6 SCC 665)
   – Concerned interpretation of “occupier” under the Factories Act, holding that one director must be notified as occupier. The Court stated the case operates in a different statutory field and cannot dilute the ESI definition.
3. E.S.I. Corpn. v. A. K. Abdul Samad (2016 4 SCC 785)
   – Laid down that the minimum fine under Section 85 is mandatory; courts may only reduce imprisonment. The present decision applies and re‑affirms this rule, declining to waive fine or reduce it below ₹5,000.
4. Pentafour Products Ltd. v. Union of India (2005 SCC OnLine Mad 841)
   – Madras HC held SICA protection does not bar criminal prosecution. Relied upon to reject the argument that “sick” status shields a company or its officers from ESI prosecution.

3.2 Legal Reasoning

1. Textual interpretation of “principal employer” (Section 2(17)):
   • Clause (i) covers owner/occupier; Clause (ii) covers government establishments; Clause (iii) residually covers “any person responsible for supervision and control”.
   • The Court emphasised the legislative intent to pierce formal titles and capture functional control; therefore, a “Technical Coordinator” acting as General Manager is liable.
2. Evidentiary sufficiency:
   • The ESIC inspection report, though prepared by an official not cross‑examined, was corroborated by company records naming the appellant General Manager.
   • The appellant had the opportunity—but failed—to produce wage slips, appointment letters, or summon contrary witnesses.
3. Coexistence of criminal liability with BIFR/SICA:
   • Sections 22 and 22A SICA suspend civil recovery efforts, not criminal prosecutions. Hence, ESI proceedings could continue unhindered.
4. Sentencing framework:
   • Although deduction‑without‑remittance technically attracts Section 85(i)(a) (minimum one‑year imprisonment + ₹10,000 fine), the Trial Court convicted under clause (b) (six months + ₹5,000).
   • Supreme Court refrained from enhancing the sentence, terming it “lenient”, but also refused to dilute it to “till rising of the Court”.
   • Relying on Abdul Samad, the Court reiterated that the statutory fine is non‑negotiable.

3.3 Likely Impact on Future Jurisprudence & Practice

• Broader prosecutorial reach: Compliance officers, plant in‑charges, operations managers, and similar managerial agents can now be prosecuted if they wield effective control, regardless of HR‑designated job titles.
• Corporate governance vigilance: Boards must clearly document appointment of the “principal employer” for ESI purposes and ensure deposits are made, else inadvertent managerial personnel may face criminal liability.
• Sentencing certainty: Trial courts cannot impose fines below ₹5,000 even when reducing imprisonment; conversely, High Courts should not interfere with statutory minima absent constitutional infirmity.
• Intersection with Insolvency framework: The ruling supports the view that IBC resolution plans or erstwhile BIFR status do not immunise defaulting officers from criminal consequences under welfare legislation.

4. Complex Concepts Simplified

Principal Employer (Section 2(17) ESI Act)

Not limited to the owner; includes anyone who actually controls and supervises the establishment. Think of it as the “captain on deck” who ensures statutory compliance.

Section 85 Offences

Creates criminal liability for various defaults. Clause (a): failing to pay contributions after deducting from wages (higher gravity). Clause (b): other failures to pay. Minimum punishment differs—one year vs. six months.

Discretionary Sentencing Proviso

Court may reduce imprisonment below the prescribed minimum for “adequate and special reasons” but cannot reduce the mandatory fine.

Sick Industrial Companies (Special Provisions) Act, 1986 (SICA)

Earlier statute providing protection to financially distressed companies. Its Section 22 suspended certain civil proceedings but explicitly excluded criminal prosecutions.

“Till Rising of the Court” Sentence

A token imprisonment that lasts only until the judge leaves the courtroom. The Supreme Court refused to adopt this leniency for ESI defaults involving deducted contributions.

5. Conclusion

The Supreme Court’s decision in Ajay Raj Shetty fortifies employee‑welfare legislation by stressing functional accountability over titular formalities. It cements the rule that any person exercising real supervisory control can be the “principal employer” and therefore faces criminal liability for non‑remittance of employee contributions. Simultaneously, it gives prosecuting agencies and trial courts a clear sentencing roadmap—mandatory minimum fines cannot be waived, and imprisonment may be reduced only with recorded special reasons. The “Shetty Doctrine” thus enhances compliance culture, removes ambiguities surrounding managerial liability, and will likely be cited extensively in forthcoming prosecutions under the ESI Act and analogous welfare statutes.