Sasikala appointed Palaniswami as her proxy after she was convicted by the Supreme Court in the DA case.
Panneerselvam took charge of the government after the December 5 death of Chief Minister J. Jayalalithaa.
After the Supreme Court upheld the earlier conviction of Sasikala, she chose Palaniswami to be her successor as the leader of the party legislature wing.
The historic conviction of V. K. Sasikala in the disproportionate assets case has vindicated all those who had faith in the judiciary that it would deliver justice without fear or favour and that despite aberrations and inordinate delays, the Indian judicial system is still robust and healthy. To prove his majority, Palanisamy should be backed by at least 118 MLAs during the floor test.
In its 42-page petition, the delegation claimed Sasikala's election was violative of the party constitution as she was chosen by the general council of the party and not the primary members.
When MGR died in 1987, Palanisamy hit a jackpot by backing Jayalalithaa and opposing MGR's wife VN Janaki, when she became chief minister for a brief period in 1988 and tried to capture the AIADMK. They then left for the resort in Kuvathur where the MLAs have been staying for over two weeks.
Palaniswami retained nearly all the ministers in the O Panneerselvam government, barring the ousted chief minister as well as education minister MF Pandiarajan who have rebelled against Sasikala.
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But some legislators claimed they were being held hostage, and said they were backing Mr Panneerselvam.
The AIADMK came to power early previous year after winning assembly elections and the new Chief Minister will have to prove he has the support of a majority of legislators from his own party.
General Secretary of All India Anna Dravida Munnetra Kazhagam (AIADMK) party, VK Sasikala arrives to surrender at Parappana Agrahara Central Jail in Bangalore after the Supreme Court rejected a plea for more time.
"In view of Wednesday's clashes between the cadres of the party's two factions when Sasikala came from Chennai by road, we have made a decision to restrict the entry of people to the prison to prevent any untoward incident", said a police official. Jayalalithaa herself was identified as the main accused but was spared explicit ignominy because she had passed away.
As neither faction appears to be in a position to command the required 118 for a simple majority so far, the fear of a divided Assembly where no faction may win a majority looms large - something that would eventually lead to a mid-term election in Tamil Nadu much to rival DMK's delight.
His choice as leader of the legislative party looks natural since the idea now was to pit one Jayalalithaa loyalist with another.