ESI Not Applicable to New Firms with Fewer Than 10 Employees | HC

Case Details: PGP & SONS vs. REGIONAL DIRECTOR, EMPLOYEES STATE INSURANCE CORPORATION - [2026] 185 taxmann.com 75 (Kerala)[30-03-2026]

Judiciary and Counsel Details

• Sathish Ninan & P. Krishna Kumar, JJ.
• K. John Mathai, Adv. & E.K. Nandakumar, Sr. Adv. for the Appellant.
• T.V. Ajayakumar, Adv. for the Respondent.

Facts of the Case

In the instant case, the erstwhile firm P.G. Parameswara Iyer and Sons was engaged in the trading of consumer goods, tea and coffee, and was covered under the ESI Act. Upon the death of the founder, his three sons decided to dissolve the partnership to facilitate partition of family properties.

The business of the erstwhile firm was discontinued on 31.03.2001. Thereafter, one son, along with his children, formed M/s P.G. Parameswara Iyer and Company at Kozhikode, while another son, along with his children, formed M/s PGP and Sons at Palakkad. Both newly constituted firms carried on the same line of business and each employed fewer than ten persons. The ESI authorities contended that both firms were covered under the Act.

M/s P.G. Parameswara Iyer and Company approached the ESI Court, Kozhikode, seeking a declaration of non-coverage with effect from 01.04.2001. The claim was allowed, with the Court holding that it was an independent establishment and, having fewer than ten employees, was not covered under the Act. However, M/s PGP and Sons approached the ESI Court, Palakkad for similar relief, which was rejected on the ground that it was a continuation of the earlier establishment and hence covered under the Act.

Aggrieved, the ESI Corporation and the respective applicants filed appeals. It was noted that the partners of the two new firms were different, the firm names were distinct, and fresh capital had been introduced in each partnership. All employees of the erstwhile firm were paid terminal benefits upon closure. New bank accounts were opened, and fresh registrations were obtained under the Sales Tax, Employees Provident Fund, and Labour laws with effect from 01.04.2001. New PAN cards were also obtained. The partnership deeds provided for re-employment of workers, and applications for registration were submitted simultaneously to the Registrar of Firms, with due intimation of the new constitution.

High Court Held

The High Court observed that, upon execution of the new partnership deeds and commencement of business thereunder, it must be inferred that the erstwhile firm stood dissolved. Since the old and new entities could not co-exist, dissolution could be implied from the surrounding circumstances.

Accordingly, the mere fact that a formal dissolution deed was executed only on 25.09.2002 would not imply that the erstwhile firm continued until that date. The High Court therefore held that both applicant firms were independent establishments and were not covered under the ESI Act.