DAMJI V ALJI SHAH & Anr. v. LIFE INSURANCE CORPORATION OF INDIA & Ors.

transferred from the General Department to the Life Department as advance to the- Life -Department Revenue Account for being added to the· Lify Fund. subject to the condition that the Life Dcrartment would· not be liable kl pay any interest thereon and th~t no repayment of the Jc.an would be made except out of the valuation surplus of the Life Department. The· first actuarial valua- tion report of the company for the year 1944--.-48, dated July 18, A B c D E F G B DAMJI VALJI 'V, L.I.C. (Dayal, J,) 669 1949, showed that the net liability of the company was Rs, 6,55,718 ~­ and that the amount the Life Fund was Rs. 6,57,4501- and therefore the fund showed a surplus of Rs. 1,732/- over the net liabilities. If the sum of Rs. 1,10,000/- had not been trans ferred to the Life Department Revenue Account prior to Dece~­ ber 31, 1948, this valuation report would have shown the net hab1- lity exceeding the amount in the life fund by about a . lakh of rupees, It is clear that the amount ~as, so transferr~d m ord.er to avoid the consequences of the net hab1httes exceedmg the Life Fund. The Profit & Loss Appropriation Account for the year 1949 shows that Rs. 60,000 /- out of this amount of Rs. l, 10,000 /- was written off as the company had made profits. Rs, 32,000 I- were again similarly transferred to the Life Fund from the General Department with retrospective effect from December 31, 1952 in order to strengthen the position of the Life Fund, to Rs, 15,36,068, The second actuarial valuation report for the period 1949-- 52, dated September 9, 1953, showed that the policy liability amounted the Life Fund stood at Rs, 15,35,890/- and that thus the Life Fund exce~ded the net liabi• lity by Rs. 2,822 /-. There was thus a surplus as Rs, 32,000 /- had been transferred to strengthen the Life Fund, with retrospective effect in view of the resolution dated August 20, 1953 whicb r~ads: "Resolved that a lean of Rs, 32,000 /- (thirty two thou sand only) bearing no interest be hereby given to Life Department by General Department with retrospective effect as on 3 lst December 1952, the repayment of which shall be made only out of the future Valuation Surplus or surpluses of the Life Department or it may be writ ten off from the future profits of the General Department This will have effect in the accounts of the Company for the year ended 31st December 1952," It is to be noted that this resolution itself said that the amount would be repaid only out of the future Valuation Surplus or sur pluses of the Life Departtnent or might be written off from the future profits of the General Department It was this amount of Rs. 82,000/- (Rs. 50,000/- plus Rs. 32,000/-) which, by a resolution dated January 6, 1956 was transferred to the General Department from the Life Fund, The resolution reads: - "Resolved that a loan of Rs. 82,000 /- (eighty two thou sand only) advanced to Life Depaxtment ~ Revei; me Ac-' count by General Department be and is hereby repaid to General Department and the balance of Rs, 60,000 /- 670 BUl'REMK COURT REPOll'fS [1965] 3 s.c.11. due to Gen-era! Department by Life Department Revenue Account be and is hereby kept in reserve for future and hence no adjustment in regard to Rs. 60,000/- will be made for the present." A This resolution was confirmed by the Board· of Directors at its meeting dated February 6, 1956. B We may now refer to the changes in law with respect to life insurance business in 1956 and an anticipation of which probahly led to the resolution of January 6, 1956. On January 19, 1956, the Life Insurance (Emergency Provisions) Ordinance, 1?56 (Ord. No.- I of 1956) was promulgated by the President. It came into force C from that day which was called the 'appointed day'. Section 3(1) provided that the management of the 'controlled business' of all insurers would vest in the Central Government on and from· the appointed day. 'Controlled business', according to cl. (2) of s. 2, meant all the business appertaining to the life insurance business, if the insurer carried on any other class of insurance business also. D Clause (b) of sub-s. (3) prohibited the incurring of any expenditure by the insurer without the previous approval of the person speci fied by the Central Government in that behalf, from the assets appertaining to the controlled business otherwise than for the pur pJse of making routine payments etc., specified in that clause. E : hose- purposes do not include the repayment of an advance made from the General Department to . the Life Fund or to the Life Department Revenue Account. Clause (c) of sub-s. (3) further pro hibited the insurer, without the previous approval of the authorised person, to transfer or otherwise dispose of any such assets apper taining. to the controlled business oi create any charge or hypothe- F cation, lien or other encumbrance thereon. It would therefore appear that possibly the Board of Dir.ectors were not right in confirming the resolution of January 6, 1959 after the Ordinance had come into force. However, that is not the point raised in these proceedings. G We have already referred to the coming into force of the LIC Act on July l. 1956 and of the transfer and vesting in the Cor poration of al! the assets and the liabilities pertaining to the life insurance business in view of s. 7 of that Act. Section 15 provides that ihe Corporation may appcy for relief to the Tribunal in res pect of a transaction which is made by the insurer whose controlled B business had been transferred to and vested in the Corporation under the Act at any time within 5 years before January 19, 1956 and by which the composite insurer has transferred any property from his life department to his general department without con sideration or for an inadequate consideration and the transfer was not reasonably necessary for the purpose of the conttalled 1'usiness of the insurer or was made with an unreasonable lack of prudence DAMJI VAI,JI v. L.I.C. (Dayal, J.) 671 A B c D on the part of the. insurer regar<l being had in either case to. the circumstances at the time. The Corporation, in such proceedmgs, had to make all parties to the transaction parties· to the applica tion. Sub-s. (2) of s. 15 empowered the Tribunalto make such order against any of the parties to the application as ~t thought just having regard to the extent to which those parties we'.e respec tively responsible for the transactio~ or benefite? from 1t and all the circumstances of the case. Section 16 provided for the pay ment of compensation to the insurer whose controlled business had been transferred to and vested in the Corporation under the Act. Section 17 provided for the constitution of Tribunals which were empowered by sub-s. (4) to regulate their own procedure and decide all matters within their competence. Section 41 provided that no civil Court would have jurisdiction to entertain or adjudi cate upon any matter which a Tribunal was empowered to decide or determine under the Act. Section 44 inter a/ia provided that nothing contained in the Act would apply in relation to any insurer whose business was being voluntarily wound-up or was being wound-up under orders of the Court. the said The Cc>rporation, by its application under s. 15. contended that the transfer ofRs. 82,000/- from the·Life Fund to the General E Department under the resolution of January 6, 195,, was iilegal, being contrary to and in contravention of the insurance Act and as such was inoperative, bad in law and not binding on the petitioner. transfer was with It was further contended out consideration and was not reasonably necessary for the purpose of the controlled business of the company and I or was made witb F unreasonable lack of prudence on the part of the company, regard being had to the circumstances at the time. It was therefore toot it prayed inter alia for a decree against the respondents for a sum of Rs. 82,000 /- with interest. It impleaded the company as res pondent No. 9, the appellants in C.A. 676 of 1962 as respondents Nos. 1 and 4 and the appellant in C.A. 677 of 1962 as respondent G No. 2. Ghanshyamdas and Damji Valji were also parties to the resolution dated February 7. 1956. Other directors who were parties to the resolution of January 6 were also impleaded. The aforesaid three d:rectors, the appellants before us, con tested the claim. of the Corporation and justified the transfer of H Rs. 82,000 /- to the General Department from the Life Fund on the ground that the amount had been lent by the General Depart ment to the Life Department and had been paid back to the General Department by transfer from the Life Fund v.:hen the Lifo Fund showed surplus, according to the report of the Actuary dated July 25, 1955. It was also contended before the Tribunal that the petition coald not be proceeded with without the leave of the Bombay High Court in view of s. 446 of the Indian Companie' 672 SUPREME COUR'f !\~PORTS 11965) 3 S.C.R. Act and that the petition was also not maintainable by reason of A s. 44 of the LIC Act. Several other grounds were also taken before the Tribunal. We are not now concerned with them. The Tribunal held that the amounts of Rs. 1,10,000/- and Rs. 30,000 /- were not advanced to the Life Department as Joans and that the transfer of Rs. 82,000/- was not out of the valuation B surplus and that therefore the transfer of this amount could not be said to be for consideration a.nd necessa.ry or reasonabl,y neces sary for the purpose of the controlled business of the company or even a prudent transaction having regard to the interest of the life policy holders. It held that no leave of the Bombay High Court was necessary for proceeding with the petition and that the peti- C tion was maintainable and that s. 44 of the LIC Act did not bDr the applicability of the provisions of the Act to the respondent company. It therefore decreed the suit and ordered the company and the directors, respondents I to 4, to pay to the Corporation jointly and severally a sum of Rs. 82,000 /- together with interest D thereon at 6 per cent per annum from September I, 1956 till full paymeni. It is against this decree that C.A. 676 of 1962 has been filed, by special leave, by Damji Valji Shah and Jayantilal Hirjibhai Chawda and C.A. 677 of 1962 by Ghanshyamdas. This judgment will govern both these appeals. E The points raisd by learned counsel for the appellants are: (i) The Tribunal had no jurisdiction to proceed with the proceed ings on the petition presented by the Corporation without the leave of the High Court in view of s. 446 of the Companies Act, 1956, the company having been ·ordered to be wound-up by the High Court on November 9, 1959, (ii) In view of s. 44(a) of the LIC Act none of the provisions of the Act applied to the company and F therefore the Tribunal could not proceed on the application of the Corporation subsequent to the company being wcund-up. (iii) The transfer of Rs. 82,000 /- from the Life Fund to the General Depart ment of the company was for consideration and was necessary for the life insurance business. The fourth point sought to be urged was that the provisions of s. J5(J)(f) of the LIC Act were ultra vires as they· contravened the provisions of Arts. 14 and 19 of the Constitution. This conten tion was .not raised before the Tribunal during the arguments and was therefore considered by it to have been abandoned. We did not therefore allow it to be raised before us. Sub-s. (I) of s. 446 of the Companies Act provides that when a winding-up order has been made or the Official Liquid1tor has been appointed as Provisional Liquidator. no suit or other legal proceeding shall be commenced or, if pending at the date of the winding-up order, shall be proceeded with against the ccmpany except by leave of the Court and subject to such terms as the G H l>AMJ! VAT.JI t'. 1 .. 1.c. (Day.d, J.) 6i3 A 11 c ]) E Court may impose. Sub·s. (2) provides. inter alia, that the Court which is winding-up the company shall, notwithstanding anything contained in any law for the time being in force, have jurisdiction to entertain or dispose of any suit or proceeding and any claim made by or against the company. Sub-s. (3) provides that any suit or prcceeding by or against the company which is pending in any Court other than that in which the winding-up is proceeding may, not·withstanding anything contained in any other law for the time being in force. be transferred to and disposed of by that Court. The question is whether these provisions would affect the proceedings of I he Tribunal. In this connection, reference may be made to s. 41 of the LIC Act which provides that no civil Court shall have jurisdiction to entertain or adjudicate upon any matter which a Tribunal is empowered to decide or determine under that Act. It is not dis· puted that the Tribunal had jurisdiction to entertain the applica tion of the Corporation and.adjudicate on the matters raised there by. The Tribunal is given the exclusive jurisdiction over this matter. It is in view of the exclusive jurisdiction ~hich sub-s. (2) of s. 446 of the Companies Act confers on the company Court to entertain or dispose of any suit or proceeding by or against a com pany or any claim made by or against it that the restriction refer red to in sub-s. (]) has been imposed on the commencement of the procee:lings or proceeding with such' proceedings against a company after a winding-up order has been made. In view of s. 41 of the UC Act the company Court has no jurisdiction to enter tain and adjudicate upon any matter which the Tribunal is em powered to decide or determine under that Act. It is not disputed that the Tribunal has jurisJiction under the Act to entertain and decide matters raised in the petition filed by the Corporation under s. 15 of the ·uc Act. It must follow that the consequential provision of sub-s. (]) of s. 446 of the Companies Act will not operate on the .proceedings which be pending before the Tribunal G or which .may be sought to be commenced before it. Further, the provisions of the special Act i e _ the LIC Act, will over-ride the provisions of the general Act viz., the Companies Act which is an Act relating to companies in general. 11 It is however conten:led for the appellants that in view of s. 44(a) of the LIC Act, s. 41 will not apply to the company whose business was being woun1:up under orders of Court and that there fore the provisions of s. 446 of the Companies Act will affect the procedings before the Tribunal. The contention is not sound. The question of the applicability of the Act to a particular insurer is to be considered in relation to facts existing when the Act came jnto force. In view of s. 44 of the LIC Act it will not apply to 674 SUPREME COC:RT ll>'PORTS (1965] 3 S.C.R, an insurer whose business· is being wound-up under orders of C<1un A. at the time when .. that Act came into force in 1956 or on the 'appointed day' i.e., September I, 1956. when the assets and li<•bi lities pertaining to the controlled business cf the company stood transferred and vested in the CorpDration. The company was l'Ol being wound-up under orders of the Court on July I, 1956 when the Act came into force or on the appointed day mentioned earlier. B. the c0mpany. The Act did apply apply merely because subsequently the company was ordered to be wound-up. It cannot cease The word 'insurer' is defined in cl. 161 of s. 2 of the UC Act and means an insurer as defined in the Insurance Act who carries a on life insurance business in India and includes the Government and a provident society as defined in s. 65 of the Insurance Act. On November 9, 1959, when the company was ordered to be wound- up it was not an 'insurer' within the meaning of the definition as the company did not carry on life insurance business in India en & that date. Its life insurance busine.,s had been taken over by the Corporation on the appointed day and it ceased to carry on that business thereafter. It follows therefore that the company was not an insurer on November 9, 1959 und cannot lil"ke advantage of the provisions of cl. (a) of s. 44 oi the UC Act. We are therefore of opinion that the Tribunal had jurisdic- tion to continue the proceedings after November 9, 1959 when the company was ordered to be wound-up and that the provisions of s. 446, Companies Act, or s. 44(al. LIC Act, do not in any "'ay affect its jurisdiction to continue the proceedings. B F We now come to the third point raised for the appellants. We agree with the Tribunal that the amounts of Rs. 1.10.000/- .tnd Rs. 32,000 /- w,ere not lent to the Life Department as such by the General Department. No question of lending money by one depm ment of the company to the other can be ordinarily contemplated. The assets of the company really constitute one entity, even though G the company maintains separate accounts with its various insurance business. It carried on other types of insur an_ce business also. We have already shown how the provisions of the Insurance Act require the company to keep a separate account for the life insurance business and to have a separate fund known as the Life Insurance Fund and to which were to be credited all H receipts due in respect of the life business and the amount deposited by the insurer in respect of life insurance business. Such a deposit is to be made in view of s. 7(1) of the Insurance Act. This requires the insurer to deposit and keep deposited with the Reserve Bank of India for and on behalf of the Central Government either in cash or in approved securities or partly in cash and partly in approved securities the sums specified in the various clauses iq respect VAi.Ji !'. L.l,C. (Day l, ,/.) 67fi. B A regard to the different types of life insurance businosses. Oause (a) requ~"s a ,\erosit of Rs. 2,00,000/- where the business done <>r to b~ done is life insurance onl:y. Clause· (e) requires a deposit of Rs. 3,00,000/- where the business done or to be done is life insur ance and any one of the three classes mentioned in clauses (bl to (d). ll<rnse (e) further provides that out of the deposit of Rs. 3,00,000 /-, Rs. 2.00,000 /- shall be the deposit for life insurance business. Section 7 lays down a statutory amount which the insurer has to deposit. It does not however restrict the insurer to deposit a larger amount in respect of life insurance business. Section 8\1) places certain restrictions about the use to be made of the depo>its under s. 7. Section 8(2) hew.ever deals with any deposit and- pro vides that where a deposit is made in respect of life in~urancc business, the deposit made in respect thereof shall m~t be available for the discharge of any liability of the insurer other than liabi lities arising out of policies of life insurance issued by the ins11rcr. This means that when an insurer puts certain money in the funds pertaining to the life insurance business and especially to a life insurance fund. such an amount can; be used only fer the discharge· of liabilities of the insurer arising out of life insurance policies issued by him. e D E F G H The amounts of Rs. 1,10,000/- and Rs. 32.000/- would thug amount to deposits made by tre company in. respect of life insur <rnce business in order to augment the life funj. This can be done either to bring the funds tc an amount exceeding the expected net lia bi\itics on the poiicies or merelv to augment that fund. It makes no difference to the company how it distributed its funds so long as its statutory liabilities. were ~atisfied. · The very con'..luct of the company with respect to lhc~.e amounts belies the alleged nature of the transfers of these amcunts to (he Life Department. The sum of Rs._ 60,000 /- out ,,f Rs. 1.10,000/- was written off in 1949. A loan of such an amount is not usually writlen off, No special reason is assiQneci for writ- ing oil the loan. The resolution ·about the transfer of Rs. 32,000,' ;c,elf speaks of· the possibility o{ the amount being written off. A le11der does not think in this wav at the time he advances a loan. It is clear that.the amount was re31\y being transferred to the Life Fund through the Life Department Revenue Acc; Junt as otherwise the Life Fund on the actuarial valuation would have stood at a figure much below liabilities on the policies as calculated in Form H, Schedule Four to the lnsurnnce Act, which is a Form giving summary and valuation of the policies. cf the company as at the date of the valuation. Form I is for the valuation balance-sheet of the company at the corres ponding date and requires in one column the net liability under business as shown in the summary and valuation of policies and· in the other column the balance of life insurance fund as shown amourit of ~76 SUPRRMF. COURT REPORT·-, [l 965] ~. s.c.n. in the balance sheet, and also provides for noting the eventual posi· A tion about the Life Fund being in surplus or fo deficiency 'as com pared to the net liability. Wheri the amount was not lent as a loan, no question of its repayment as such could have arisen in 1956. of·course whenever the Life Fund showed an actuarial valuati0n surplus' th~t surplus or part of it could be transferred to t]]e General Department according to the desire of the management. B The amount of Rs. 82,000 /. was not transferred as a result of the actuarial valuation as contemplated by _the· various resolu· tions which authorised the transfer of the amount from the General Department to the Life Department Revenue Account. It was definitely provided in those resolutions that no repayment of the C amount would be inade except out. of valuation surpluses of the Life Department. The expression 'valuation surplus" has a .technical meaning ·under the Act. D . Section 13(]) of the Insurance'. Act provides that e<very insurer carrying on life insurance business shall, ii) respect cf the life insur· ·ance business transacted in lndia.-cause once at least in every three ylf.irs an investigation to be macie-b¥ an ectuary into the financial condition of the life insurance business c•rried on by him, includ· E ing the valuation of pis liabilities in respect thereto. An abstract of the report of the actuary is to be made in accordance with 'the ·regulations contained in Part r cf the Fourth SchMule and in con- Jormity with the· requirements of Part II of that Schedule. Section. - 13(2) provides that the provisions of sub-s. (]) regirding the m,aking of an ab; tract shall <i;pply whenever at any other time an investiga· F lion into the financial conditicn of the insurer. is made with a 'view to the distribution of profits or an iqvestigation is made of which the res~i:t, are m<1de public. The abstract is to be certified on behalf of the insurer to the effect 1hat fulJ anj effective particulars of every' policy under which there is a liability either actual or con tingent have been furnishej to ·the actuary for the purpose of inves- G ligation. Section 15 requires the submission of the aforesaid abstract to the Controller within the specified period. Part II of the Fourth Schedule requires that° every extract prepared in eccordance with the requirements of that part of the Schedule win have the state- H ment of a consolidated revenue. a.ccount in' Ferm G, a sumrnarv an:! valuation in Form H. a valuation balance sheet in Form I and a statement in Farm DDD rs set forth in Part IT of the Third Sche· dule annexed to it. The valuation balance sheet in Form I requires the, noting of a surplus: if any, of the balence of the life insurance fund as compared tc the- net •liability ·in tire business as shown in the sum111ary and valu"ation of policies. It is the surplus noted in this - __ ___..__ ~- A B c D E DAM.JI VAi.Ji v. L.I.C. (Duy;!, J.) 677 Form I which is really the valuation surplus. It was out of such sur plus that the company resolved that the advances of Rs. l,I0,000/ and Rs. 32,000 /- could be paid to the General Department by the Life Department. No such actuarial valuation was made by the actuary prior to the transfer of Rs. 82,000/- to the General Fund by the resolution dated January 6, 1956. Reliance in this connection is placed on behalf of the appel lants on the letter of the actuary dated July 25, 1955. The actuarY' states: "On the above basis, the valuation shows a policy liabi lity of Rs. 20,20,421. The Life Insurance Fund is Rs. 21,32,455. Thus there is a surplus of Rs. 1.12.033. The surplus includes Rs. 53,300 being the amount of ap preciation on investments taken into account by you in the past two years. Thus the net working surplus is Rs. 58,733/-. The cost of Bonus at the rate of Rs. JO/- per thousand is approximately Rs. 48,000 /-. Thus the surplus is sufficient to enable a bonus declara tion at the above rate even after excluding the appreciation amount or setting it a part as an additional reserve for future use. Conclusion: The result is satisfactory. Cont" nuing the same method of working as you have followed. the sta tutory valuation ·as on 31-12-55 will surely enable you to declare a higher bonus." F firstly, it does not appear th3t the actuary had really conducted an investigation and submitted the valuation report as required by s. 13, of the Insurance Act. There is nothing on the record to show that any ubstract in Form I, Fourth Schedule, was prepared and submitted to the Controller. Further. the letter shows that the G net working surplus was only Rs. 58,733/- as the ostensible surplus of Rs. 1,12,033 /- included Rs. 53,300 /- by which certain invest· ments of the company had appreciated in that period. 'When the net working surplus was much less than Rs. 82,000/- which were transferred from the Life Department to the General Department, the transfer of Rs. 82,000/- cannot be said to have been in accord- :H ance with the terms on which the alleged Joan was made to the Life Department from the General Department. When the Life Department had not Rs. 82,000 /- with itself, there could not have been any necessity to pay that amount to the General Department. In fact, the alleged loan could be paid only when there would have been a valuation surplus in the accounts of the Life Depart ment but this does not mean that the Life Department was bound to pay back the amount. the moment it had any valuation surplus. 678 SUPRE~IE COURT REPOJtTS [196rtj 3 s.c.R. Its liability to pay the alleged loan could arise only when there was a valuation surplus. Its paying the amount actually would: depend upon the circumstances prevailing at the time. • A Jn the circumstances, we cannot resist the conclusion thar the Directors passed a resolution for the transfer of this amount on January 6, 1956 in anticipation of some law depriving the ccm- B pany of its life insurance business. It may be that it was a close secret that an Ordinance would te issued on January 19. But all the same, possibly, persons in the insurance world could have had an inkling of the trend of events. The content of the resolution passed en January 6, indicates g that the directors had no clear idea at the time as to how much t-he Life Department. according them, owed to the General Department. The resolution speaks not only of the transfer of Rs. 82,000 /- to the General Depa.rtment but also refers to t.hei bafance of Rs. 60,000 /- due to the General Department by the Lifo Department Revenue Account. The amount had been written off D ·in 1950 and could not have tl1ereafter been considered to be a loan advanced to the Life Department Revenue Account from the Gene- ral Department. It seems that the resolution was passed in some hurry and the Directors could not definitely decide as to how any further amount upto Rs. 60.000 /- could be taken back te the General Department from the Life Department Revenue Account. E Any way, such a resolution of the Directors indicates that any entries with respect to the alleged loans were made for the pur pose of accounting and the necessities of the business. Money in the Life Fund had to be augmented in 1948 and 1952 in order to make the Life Fund ~xceed the net liabilities of !he company on account of the life insurance policies. F ' We are therefore of opinion that the Tribunal took a correct view about the nature of the transfer of Rs. 1,10,000/- in 1948 and Rs. 32,000 /- in 1952 to the Life Insurance Fund and rightly held that the transfer of Rs. 82,000 /- to the General Department by' resolution dated Januarv 6, 1956, was not in ac~ordance with the G i;rovisions of the rn, urance Act and that con, equently that amount insurance to form part of the assets of the· life continued business of the comoany upto September !, 1956 and that as such vested in the Corporation which could recover it from the company and the directors responsible for the transfer of the amount to the General Department. H The appeals therefore fail and are dismissed with costs, one hearing fee. Appeals dismissetl-