Introduction

• As per Section 4 of the Indian Partnership Act, 1932 (IPA) partnership is the relation between the persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
• The basis of partnership is mutual agency between the parties.

Facts

• The Respondent in this case Ramanuja Match Industries was a firm engaged in the manufacturing of matches in the State of Kerela.
• The firm had 18 regular employees and 3 partners who worked for wages.
• As per the Employee State Insurance Act, 1948 (ESIA) the liability to contribute to the Insurance under the Act was incurred when the number of employees exceeded 20.
• The inspector in this case found that the number of employees were 20 (18 employees and 2 partners). Therefore, the respondent incurred liability under the Act to contribute.
• The Respondent challenged this liability in the Employee Insurance Court at Calicut.
• The Employee Insurance Court ruled in favour of the respondents.
• The matter was then carried to the High Court and the Division Bench held that the partners were not employees.
• It is against this decision that appeal was filed in the Supreme Court.

Issue Involved

• Whether a partner of a firm is an “employee” within the meaning of Section 2(9) of the ESIA?

Observations

• The Court in this case observed that the term “employee” under Section 2(9) of ESIA is defined as: “any person employed for wages in or in connection with the work of a factory or establishment to which the Act applies” and includes one falling under (i), (ii), (iii).
• Since the respondent was a partnership firm Court observed the principles and the provisions governing partnership firm:
  • Section 4 of IPA defines ‘partnership’ and one of the essential prerequisites for partnership is the presence of mutual agency between the parties.
  • Section 18 of IPA provides that every partner is the agent of the firm for the purposes of business of the firm.
  • Section 19 of IPA provides that an act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm.
  • Further, it was observed that a partnership is not a legal entity.
  • The status of the partners and their relation with the firm was discussed by the Court in the case of Champaran Cane Concern v. State of Bihar (1963). The following points were held in this case:
    • In a partnership firm each partner acts as an agent of other.
    • The relation of partner and the firm is not that of a master and a servant or an employee which involves an element of subordination.
    • The partnership business belongs to the partners and they are owners of the firm.
    • Thus, the status of the partner is different from the employees working under the firm and even if the partner is paid some remuneration it would not involve any change of status.
• The Court discussed the opinion of Justice Mathew in the case of Ellis v. Joseph Ellis & Co. (1905) where the Court held that
  • “The argument on behalf of the applicant in this appeal appears to involve a legal impossibility, namely, that the same person can occupy the position of being both master and servant, employer and employed.”
• Thus, it was held that the position in United States, Great Britain and Australia is that partner is not to be treated as an employee merely because he receives a wage or remuneration for work done for the firm.
• Another argument forwarded in this case was that a liberal interpretation should be given to the provision since it is beneficial legislation.
  • The Court however held that where the beneficial statute has a scheme of it’s own there is no need for the Court to travel beyond the scheme and extend the scope of the statute
  • Thus, the Court held that in finding whether a partner would be an employee a liberal interpretation is not warranted.
  • Thus, a person who does not fall under the definition of employee shall not be taken into account while fixing statutory minimum.
• Thus, the Court held in this case that a partner is not an employee and should not be included while enumerating the number of employees.

Conclusion

The partners in a partnership firm are mutual agents of each other. A partner, even if he receives remuneration, cannot be said to be an employee for the purposes of Section 2 (6) of ESIA.