1 ST v. THE NEW INDIA ASSURANCE CFOMPANY LTD.

lakhs against the amount of Rs. 7.5 lakhs insured by Sri. J. Giridhar, Sales Officer of the Ahamedabad branch. Later, a reminder was also issued and the Insurance company had informed that the report was not finalised. Accordingly, C.A. 404 of 1998 was filed for a direction to furnish the survey report and also for directing the appellant herein to settle the claim and disburse the amount. It was opposed by the appellant. Co.A.No. 31 of 2003 4

#5. The learned Single Judge, on considering the matter, found that the total amount embezzled by the employees was Rs.19,35,298.40. But an amount of Rs.12,22,393.64 was regarding the amount embezzled prior to the inception of the policy and the amount embezzled during the period of insurance was Rs.6,90,904.76. Out of the above, an amount of Rs.2,28,824.50 was recovered and the balance was Rs.4,62,080/- The second respondent in its report found that the liability of the insurer should not exceed Rs. 4,62,080/- The claimant was found entitled to the above amount from the appellant in view of the fidelity insurance policy.

#6. The company application was allowed and the insurance company was held liable to pay Rs.4,62,080/- to the Official Liquidator in respect of the insurance claim. The Official Liquidator was granted interest on the above amount at the rate of 12% from the date of the said order. Against that order, the first respondent Insurance Company filed this appeal. The second respondent has filed a Cross Objection No.93 of 2005 for enhancement. Co.A.No. 31 of 2003 5

#7. Heard the learned counsel for the appellant and the learned senior counsel for the respondents.

#8. Contentions of the Appellant: It is contended that the claim was finalised and repudiated by Ext.R1(a) dated 8.4.1999. It is not challenged. It is further contended that the prayers in the Company Application have been satisfied when Ext.R1(a) was issued. He would further contend that the Company was obliged to disclose the state of its health and in particular, the fact that it had decided to close down its manufacturing operations with effect from 31.8.1991 in its Board Meeting held on 31.7.1991. The proposal was made on 12.8.1991 and the policy was issued on 30.8.1991. It is further contended that the Company did not disclose material facts relating to the misappropriation and misconduct of its employees of the Bombay Office of which it was aware of.

#9. Learned counsel for the appellant submitted that at the time of submitting the proposal and obtaining the policy, the said company was very much aware of the fraud and embezzlement of money by Co.A.No. 31 of 2003 6 some of its employees, which was suppressed by the insured company while taking the policy from the appellant/insurer. The concerned fidelity guarantee policy was taken by the company under liquidation for the first time in August, 1991. The reasons stated by the second respondent herein for taking a new fidelity guarantee policy by the company under liquidation on 12.8.1991 was that the said company was not sure as to how the employees would react to the closing down of the factory from 31.8.1991 pursuant to the decision of the Board of Directors taken in this regard on 31.7.1991.

#10. The second respondent has no case that the decision taken by the Board on 31.7.1991 to close down the unit from 31.8.1991 was brought to the knowledge of the appellant at the time of submitting Annex.R1(c) proposal on 12.8.1991 or till obtaining the policy.

#11. In the decision reported in United India Insurance Co. Ltd. v. M.K.J. Corporation ((1996) 6 SCC 428) it was held that: Co.A.No. 31 of 2003 7 “It is a fundamental principle of Insurance law that utmost good faith must be observed by the contracting parties. Good faith forbids either party from concealing (non-disclosure) what he privately knows, to draw the other into a bargain, from his ignorance of that fact and his believing the contrary. Just as the insured has a duty to disclose, “similarly, it is the duty of the insurers and their agents to disclose all material facts within their knowledge, since obligation of good faith applies to them equally with the assured”. The duty of good faith is of a continuing nature. After the completion of the contract, no material alteration can be made in its terms except by mutual consent. The materiality of a fact is judged by the circumstances existing at the time when the contract is concluded.”

#12. In the decision reported in Food Corporation of India v. New India Assurance Co. Ltd. ((1994) 3 SCC 324) it was held that: “'Fidelity' according to dictionary means faithfulness, loyalty. In insurance terminology it is Co.A.No. 31 of 2003 8 understood as assurance to indemnify against loss consequent upon the dishonesty or default. Usually the assured and the person whose fidelity is assured stand to each other in relation of employer and employee. As the use of the word 'fidelity' indicates, “it is a policy intended to protect the assured against the contingency of breach of fidelity on part of a person in whom confidence has been placed”. It is a contract whereby, for a consideration, one agrees to indemnify another against loss arising from the want of honesty, integrity or fidelity of an employee or other person holding a position of trust. Fidelity Guarantee is different contingency guarantee. The insurance under it is for honesty, against negligence or for being faithful and loyal. The protection afforded is different than normal insurance policy. Its consequences and enforcement are also not the same. The employer or the principal has first to be satisfied about the breach. No action can be taken on suspicion. In Co.A.No. 31 of 2003 9 contingency insurance the cause of action arises immediately whereas in Fidelity Guarantee it has to be ascertained and verified. And on being satisfied the company must necessarily be informed of it to enable the principal to seek its remedy in the court of law. The enforceability of the Fidelity Insurance depends on satisfaction by the insured of dishonesty or negligence of the other side and its intimation either during the contract period or within the time agreed from the termination of contract.” The learned counsel for the appellant cited a number of decisions, in which similar view was taken.

#13. Mere silence of a party to an agreement does not ordinarily afford the other party a ground for avoiding the agreement. But, in some cases the law imposes on the parties the duty of making full disclosure of relevant facts, due to peculiar relationship of parties or due to the fact that one of the parties has peculiar means of Co.A.No. 31 of 2003 10 knowledge which are not accessible to the other. Contracts between such parties are called contracts uberriamae fide, and in such cases silence amounts to fraud. These are the exceptions to the rule caveat emptor (let the buyer beware). Contracts between principal and agent, guardian and ward, trustee and beneficiary, doctor and patient, lawyer and client are examples of such contracts.

#14. In such contracts, no element of fraud or misrepresentation is necessary to give rise to a right of a rescission of the contract. Mere absence of sufficient disclosure is enough to entitle a party to avoid such contract. Insurance contracts require the utmost good faith and the most complete disclosure of all material facts by the assured to the insurers. If such disclosure is not made the insurers are entitled to avoid the contract, though the omission may have been unintentional or accidental.

#15. Shri Chacko George, learned senior counsel appearing for the respondents would contend as follows: Co.A.No. 31 of 2003 11 Ext.R1(a) is not a finalisation of the claim, but a repudiation of the contract of insurance itself during the pendency of the Company Application. He would contend that the repudiation is bad. There is an inordinate delay, and that it is not correct that it is not challenged. It is further contended that it is not correct to contend that the prayers in the Company Application have been satisfied as the recovery of the amount is sought. It is contended further that non-disclosure of the Company's sickness is an after-thought, and not seen in Ext.R1(a). It is pointed out that the Managers of the Company were having day-to-day contract with the Company for several years in respect of several other policies covering several subjects of insurance involving premia of several Lakhs of Rupees every year. They knew that the Company was in a sick condition when proposal was made. It is further pointed out that a number of policies were kept alive and the premia was paid and that the Managers of the appellant who were then in office, though aware of the situation did not choose to impugn the policy within a reasonable time. The non-disclosure is being raised by the Managers Co.A.No. 31 of 2003 12 who came several years after issuance of the policy who did not have personal knowledge which their predecessors had. It is further contended that the fact that the fidelity policy was a first time policy, was not a ground to repudiate the subject policy.

#16. As regards the further question about the Company being aware about the ongoing fraud and embezzlement by employees of the Bombay Branch, it is contended that the Company had actually in place what they believed was an embezzlement proof system. It is submitted that a wrong presumption had been drawn based on an inadequate understanding of the Organisation of sales and the method of accounting in the Branches. He would point out that in regard to the return of the lorry receipts by the Bank of Maharashtra, it did not raise any alarm in the facts and circumstances present. As regards the contention based on the visits of the Sales Manager Shri Shyam Sunder to Bombay, it is contended that it was unconnected with the return of lorry receipts by the Bank of Maharashtra. It is further contended that these Reports were geared to enhance sales without being aware of the Co.A.No. 31 of 2003 13 ongoing fraud and embezzlement. He invites our attention to the Reports as also the Affidavit by Shri S.P. Singh in this regard. He also would contend that Ext.R1(d) complaint to the Police would not establish that there was prior knowledge of the embezzlement.

#17. Let us now examine the chronology of the events. On

31.7.1991, the Company Board approved the Accounts and directed reference of sickness to the BIFR. It took a decision also to stop the manufacturing activity on 31.8.1991. On 12.8.1991, it made the fidelity insurance policy proposal in respect of the Head Office and four Branches. The policy was issued on 30.8.1991. In respect of the Bombay Office, 27 employees were covered for a sum of Rs.68 Lakhs. It launched a claim on 26.3.1992. The appellant appointed Surveyors. The Company filed a complaint to the Bombay police on 5.2.1993. On

5.11.1996, the Company was ordered to be wound up in C.P. No.1/96. A letter was sent on 18.12.1996 in regard to the pending insurance claim. The Official Liquidator took up the matter in March 1997 with the Surveyors. The surveyors wrote back on 23.3.1997 to make Co.A.No. 31 of 2003 14 available records for inspection. Thereafter, the Surveyors filed a Report after filing of the Company Application in question, namely No.404/98 on 28.8.1998. The Surveyors filed a Report with the appellant on 28.8.1998. It is the case of the second respondent that there was no copy given to the Company. On 8.4.1999, by Ext.R1(a), the appellant repudiated the contracted insurance which is about seven years after the claim was launched.

#18. The learned Company Judge found that the appellant should have anticipated that some thing had gone wrong with the proper functioning of the Company and the acts of the employees. It is stated that the fidelity insurance was taken for the first time and the appellant should have enquired why the policy was taken at the first stage, when it was aware of the financial position of the Company. He also took note of the fact that the appellant was the only insurance company having business dealings with the Company for the last many years. He, therefore, rejected the contention that the material facts regarding the sinking stage of the Company have been concealed from the Co.A.No. 31 of 2003 15 appellant. After referring to the letter dated 18.6.1991 by the Bank of Maharashtra addressed to the Head Office of the Company about something going wrong with the Bombay Branch and Ext.R3(a) Report of Shri Shyam Sunder, it is held that the Report did not point out any dishonesty or mal-practice from the part of any particular Officer or staff, but it revealed that certain manipulations were going on in the Bombay Office. He finds that Ext.R3(b) Report of Shri Shyam Sunder did not reveal any fraud or embezzlement by any particular Officer or staff of the Bombay Branch. It is further found that there was no proper system for monitoring the day-to-day affairs of the Branch Office and finally it was found that there was no willful concealment of any material facts amounting to any misrepresentation or fraud as alleged by the appellant. The learned Judge further found that the Report of Shri Shyam Sunder did not disclose that he had identified the nature of misappropriation of the employees involved on the same. Reference is made to the disciplinary action taken against the employees and the Report further revealing that the Company was Co.A.No. 31 of 2003 16 pursuing the matter and taking appropriate action against the culprits. A complaint was lodged in 1993 before the Police. It is further found that of the twentyseven employees of the Bombay Branch insured, only seven were involved in the misappropriation and that when the proposal was made, the Company was not aware of the identity of the persons who were involved in the embezzlement of money and misappropriation of the money of the Company. Taking note of Section 19 of the Contract Act and the fact that the repudiation was made after a period of eight years and finding that the long delay could not be properly explained by the appellant, it was found that they could have obtained the Report earlier from the Surveyors and the repudiation after eight years could not be justified.

#19. Following are the questions which arise for our consideration : 1) Whether the repudiation is bad for the lapse of about eight years ? Co.A.No. 31 of 2003 17 2) Whether having regard to the prayers in the Company Application, the Company Application had become infructuous ? 3) What is the effect of Ext.R1(a) repudiation ? 4) Whether the non-disclosure of the sickness of the Company, the decision to close down the Company and followed up by the closure by the Company of the manufacturing activities of the company with effect from 31.8.1991 ought to have been brought to the notice of the appellant and whether it justified the repudiation of the contract ? 5) Whether the Company has concealed material facts from the appellant relating to the misconduct on the part of its employees in the Bombay Branch and therefore the repudiation was justified ?

#20. A contract of insurance is uberrimae fide contract. It, undoubtedly requires utmost good faith on the part of the assured. This is what the Apex Court has held in the decision in Satwant Kaur Co.A.No. 31 of 2003 18 Sandhu v. New India Assurance Company Limited ((2009) 8 SCC 316). As regards what is the material fact, the Court held further as follows: “Thus, when an information on a specific aspect is asked for in the proposal form, an assured is under a solemn obligation to make a true and full disclosure of the information on the subject which is within his knowledge. It is not for the proposer to determine whether the information sought for is material for the purpose of the policy or not. Of course, the obligation to disclose extends only to facts which are known to the applicant and not to what he ought to have known. The obligation to disclose necessarily depends upon the knowledge one possesses. His opinion of the materiality of that knowledge is of no moment................The term “material fact” is not defined in the Insurance Act, 1938 and, therefore, it has been understood and explained by the courts in general terms to mean as any fact which would influence the judgment of a prudent insurer in fact which goes to the root of the contract of insurance and has a bearing on the risk involved would be Co.A.No. 31 of 2003 19 “material”...............Thus, in a contract of insurance, any fact which would influence the mind of a prudent insurer in deciding whether to accept or not to accept the risk is a “material fact”. If the proposer has knowledge of such fact, he is obliged to disclosure it particularly while answering questions in the proposal form. Any inaccurate answer will entitle the insurer to repudiate his liability because there is clear presumption that any information sought for in the proposal form is material for the purpose of entering into a contract of insurance.” It was held further as follows, with regard to Section 45 of the Insurance Act, 1938: “There is no dispute that Section 45 of the Insurance Act, 1938 (for short “the Act”), which places restrictions on the right of the insurer to call in question a life insurance policy on the ground of misstatement after a particular period, has no application on the facts at hand, inasmuch as the said provision applies only in a case of life insurance policy. The present case relates Co.A.No. 31 of 2003 20 to a mediclaim policy, which is entirely different from a life insurance policy.”

#21. What is the effect of Ext.R1(a) and whether the prayers in the Company Application have been satisfied ? Ext.R1(a) is dated 8.4.1999. It is stated therein that it is suppressing the fact of fraudulent transactions done by the staff as early as in July, 1991 that the proposal was submitted for the insurance making wrong submissions and willful misrepresentation. It is further stated that as such the very contract of insurance is null and void and it was further stated that the appellant is not liable to make good the loss suffered by the Company. We are inclined to hold that Ext.R1(a) would show that the appellant was repudiating the contract of insurance itself as it is stated that the contract of insurance is null and void. On the said basis, it is stated that “hence the claim is refused”. It is admittedly passed during the pendency of the Company Application. It is to be noted that the prayers included the direction to adjudicate the Co.A.No. 31 of 2003 21 claim filed by the Company and to direct the Surveyors to submit the Report to the appellant and to direct the appellant to disburse the amount. Apart from a direction sought to adjudicate the claim, also there is a prayer to disburse the amount. We are, therefore, of the view that the mere fact that the Company has repudiated the contract, would not take away the power of the Company Court to consider the claim for the amount, if the repudiation is found to be without basis.

#22. Whether the repudiation is justifiable ? We will proceed now to consider whether the repudiation is justified on the ground that there was a misrepresentation or fraud on two counts: Firstly, whether the non-disclosure of the decision on

15.8.1991 by the Board of Directors of the Company to close down the manufacturing activities with effect from 31.8.1991 would justify repudiation ? Secondly, whether repudiation is justified on the ground that the Company has misrepresented or committed fraud on the appellant in so far as it did not take the appellant into confidence about the situation in its Bombay Office ? Co.A.No. 31 of 2003 22

#23. As regards the first question is concerned, the proposal made by the Company is produced as Ext.R1(c). Ext.R1(c) is dated

12.8.1991. In it, as pointed out by the appellant, against the column “business and address”, it is, inter alia, stated “manufacturers of dry cell batteries”. It is also stated that there is an annual audit by the statutory auditors and also audit every six months by auditors appointed by the Banks. It is, of course, declared, inter alia, that the statements given by the Company will be taken as forming basis of the contract. It is not disputed that on 31.7.1991 the Board of Directors took a decision to stop the manufacturing operations with effect from

31.8.1991. Therefore, at the time when the proposal was made, the Company was aware that the manufacturing operations would be stopped on 31.8.1991. Acting on the basis of Ext.R1(c) proposal, the policy was issued on 30.8.1991. On the very next day, namely on

31.8.1991, as originally decided, the Company's manufacturing operations came to be stopped. Undoubtedly, the fact that the Company would stop its manufacturing operations, was well known to Co.A.No. 31 of 2003 23 the Company, as its Board of Directors had already taken a decision on

31.7.1991 to stop manufacturing operations of the Company. However, the contentions taken by the respondents are as follows: It is not a ground taken in Ext.R1(a). It is further stated that the appellant's then Managers were having day-to-day contact with the Company for several years and they were aware of the Company being in sick condition. It is further stated that the pleading would show that the appellant was aware of the condition of the Company. Thus, in essence, the case is that the Insurance Company was aware of the sickness of the Company. In this context, it is also necessary to consider the contention that it is for the first time that the Company was taking a fidelity insurance. According to the Company, the reason why it decided to take the fidelity insurance was that the policy was intended to cover the loss sustained by fraud or embezzlement on the part of the named Officers and the staff of the Company and not loss sustained by the Company in the manufacturing or trading operations. It is further stated in the Affidavit of the second respondent that except Co.A.No. 31 of 2003 24 in one instance of defalcation in the Bangalore Branch which had happened about fifteen years or more, before the closure of the Company, there was no instance of embezzlement. It is further stated that all these Officers manning the several Branch Offices of the Company and the field staff under them had very good record of fidelity. But, not knowing how the said Officers might react, once it became clear to them that their continued services with the company had become uncertain and would come to termination at any time, the Company had to make appropriate prognosis and to take care of all the unpredictable situations. It is further contended that the insurance cover was extended to all the Branches of the Company in India, namely Bombay, Ahamedabad, Bangalore and Madras. The total cover was Rs.129 Lakhs. Fortyseven employees were covered. Of the same, twentyseven persons were from Bombay Office and the cover in regard to them was Rs.68 Lakhs. It is also contended with reference to the fact that the fidelity insurance was taken for the first time, it is quite justifiable in the circumstances, namely the fact of uncertainty about Co.A.No. 31 of 2003 25 the affairs of the Company arising out of its sickness. It is further contended that there was inordinate delay in repudiating the contract. It is pointed out that there was contact between the appellant and of the Company, particularly in connection with various policies of insurance which had been taken by the Company. Premia was being paid and accepted. Appellant was aware of the closing down of the Company and the repudiation came after nearly seven years. It is contended that the Company was a well known Company and the fact of its having stopped its manufacturing activities was attended with considerable publicity. At any rate, the appellant could not plead ignorance and having not chosen to repudiate the contract within a reasonable time, it is not open to the appellant to repudiate the contract, it is submitted.

#24. Learned counsel for the appellant would contend that even proceeding on the basis that the Sales Offices may have continued, what was of great weight was the fact that the Company was a manufacturing Company. It is specifically so stated, as already noted in Ext.R1(c). Thus, the appellant held out that the Company is carrying Co.A.No. 31 of 2003 26 on manufacturing business. If it had been known to the appellant that the manufacturing activities would come to an end on 31.8.1991, it is submitted, the appellant would not have been persuaded to enter into the contract of insurance with the Company.

#25. It is elementary that a contract of insurance is an uberriamae fide contract. Even according to the Company, the Company had taken a decision to close down its manufacturing operations in its Board Meeting held on 31.7.1991 with effect from 31.8.1991. The reason why it has decided to enter into a fidelity insurance was that it was not sure as to how its employees would react to its decision. It is specifically stated in the Affidavit of the second respondent that all the Officers manning the Branch Office and the field staff had a very good record of fidelity and, therefore, fidelity cover had not been thought of or obtained until the Company decided to shut down its manufacturing operations, but there was no knowing how the self-same Officers and field staff might react once it became clear to them that their continued service with the Company had become uncertain and could come to Co.A.No. 31 of 2003 27 termination at any time before long. The Company, it is stated, had necessary appropriate prognosis and take care of the unpredictable situation and the proposal was made in the said background. Thus, even according to the second respondent, the decision was taken in the light of the fact that it has decided to close down its manufacturing activities. Therefore, its decision to close down its manufacturing operations with effect from 31.8.991 was the very reason why it decided to go in for the fidelity contract. If that be so, we are of the firm view that this fact was a material fact in the context of a contract of insurance which the Company was obliged to disclose to its insurer. When the Company itself proceeds on the basis that it was not certain as to how the Officers would react to the decision to close down its manufacturing operations creating a cloud over their future and accordingly a contract of fidelity insurance was contemplated and all this ultimately stemmed from its decision of its Board of Directors to close down the manufacturing operations, we are of the view that it is not open to the appellant to contend that the Officers of the Company Co.A.No. 31 of 2003 28 were aware of the sickness of the Company, and that in the very nature of a contract of insurance, the admitted awareness of a crucial and material fact, namely the decision of its Board of Directors to close down its manufacturing operations, ought to have been brought to the notice of the insurer. There is nothing on record to conclude that the appellant was aware of the decision of the Board of Directors to close down its manufacturing operations on 31.8.1991. The Company made the proposal for insurance on 12.8.1991, at a time when it was certainly aware of its decision on 31.7.1992 to close down its manufacturing operations from 31.8.1991. It is without disclosing this fact that on the basis of the proposal made on 12.8.1991 that the appellant Insurance Company was persuaded to issue the contract of insurance on

30.8.1991. On the very next day, in implementation of the decision on

31.7.1992, it is not in dispute that the manufacturing operations of the Company came to be closed. We cannot overlook the argument of the insurer that this fact may have dissuaded from entering into the contract of insurance, had it been brought to its notice. It is clear that going by Co.A.No. 31 of 2003 29 Ext.R1(a) proposal form, it was held out by the Company that it was a manufacturer. The impression, apparently created with the insurer was that the manufacturing operations would continue. Unlike a contract of insurance on life, there may not be any limitation as such in repudiating the contract of insurance on the aforesaid ground under Section 45 of the Insurance Act, 1938.

#26. The further question which arises is whether the appellant was justified in repudiating the contract on the ground of non- disclosure of the fact of the misappropriation being conducted by some of the employees in the Bombay Office. It cannot be in dispute that the performance of the Bombay Office had become a matter of concern for the Company. Of course, the case of the Company is that it had a full- proof system, that is to say, goods are invoiced to the dealers and despatched to them through approved road carriers for delivery against production of L.Rs. The documents are despatched to the dealers' notified Banks for delivery to them against payment of the invoice value. Upon payment of the invoice value, the dealers collect their Co.A.No. 31 of 2003 30 documents from their Banks and obtain the goods. It is not in dispute that in June 1991, the Bank of Maharashtra, Kannad Branch returned certain overdue unpaid documents to the Bombay Office by VPP for a relatively small amount. This was also endorsed to the Head Office. It is the case of the respondents that there was nothing in the letter to arouse any suspicion on the part of the Head Office about any defalcation or embezzlement taking place in the Bombay Branch. On the one hand, the appellant would contend that the Report of the Sales Manager Shri Shyam Sunder would reveal that there was misconduct of employees. The respondents would contend that there is no such Report as is referred to in the Survey Report. The second respondent has produced Exts.R3(a) and R3(b) Reports. It is the second respondent's case that the Reports would not reveal any defalcation or embezzlement. The Reports essentially refer to the steps needed to be taken for maximising the realisation. Of course, according to the appellant, they are not the Reports. But, what is on record is only Exts.R3(a) and R3(b). A perusal of Exts.R3 (a) and R3(b) do not Co.A.No. 31 of 2003 31 appear to show that it refers to any case of dishonesty or mal-practice on the part of the employees. But, there is specific reference to outstanding bills and old bills. There is reference to lethargy with the Bombay Field Force. Of course, in Ext.R1(b) Survey Report, it is specifically found that there is fraud committed by the employees in the Bombay Branch. There is a finding that Shri Shyam Sunder found that there is a diversion of stock and receipt of cash which were not recorded in the Bombay Branch's Books of Account and it was reported by Shri Shyam Sunder in July, 1991. It is also stated that the Head Office suspended the Regional Manager of the Bombay Office, Shri Anand on 23.10.1991 and he was later dismissed. There was similar disciplinary action against other employees. It is found that apart from diversion of stock, there was unauthorised delivery of stocks from the transporters on the basis of letters by Shri Anand. The Surveyors, inter alia, observed that it is an instance where almost the entire Branch staff had defrauded the Company. It is further observed that one of the main reasons for fraud for such a large amount is that the Company did not Co.A.No. 31 of 2003 32 have proper procedures for close verification of Accounts. It is stated that independent balance confirmations were not obtained from various dealers. It is stated that they do not understand what the Auditors of the Company were checking and how they failed to discover the fraud, and that one of the main jobs of an Auditor is to obtain independent balance confirmation from various debtors.

#27. Undoubtedly, going by the Reports Exts.R3(a) and R3(b), the Company must be treated as aware that there were outstandings in its Bombay Branch. The appellant relied on the decision in Sarojam v. L.I.C. of India (1985 KLT 865). Therein, this Court referred to the following passage from E.R. Hardy Ivamy on General Principles of Insurance Law (Fourth Edition) (at page 133), wherein the learned Author states as follows: “The duty of making disclosure is not confined to such facts as are within the actual knowledge of the assured. It extends to all material facts which he ought in the ordinary course of business to have known, and he Co.A.No. 31 of 2003 33 cannot escape the consequences of not disclosing them on the ground that he did not know them.” It is further stated by the learned Author as follows: “There is, however, no duty to disclose facts which the assured did not know, and which he could not be reasonably expected to know at any material time.................Where the fact could have been discovered by the assured if he had made reasonable enquiries, he is guilty of a breach of duty towards the insurers. This is clearly the case where, although the fact in question was never within his actual knowledge, his ignorance was due to his intentional failure to make such enquiries as he might reasonably have been expected to make in the circumstances; and the policy is therefore voidable at the instance of the insurers since his failure to make them is evidence of fraud and lack of uberrima fides.”

#28. We are of the view that in the circumstances of the case, the Company, at any rate, by exercise of due diligence would have come by possession of admittedly correct state of affairs. Even according to it, it Co.A.No. 31 of 2003 34 was alerted about the unsatisfactory affairs of the Bombay Office so as to send one of its Sales Managers who has sent Exts. Exts.R3(a) and R3 (b) Reports. In such circumstances, we are of the view that the appellant is justified in contending that the contract of insurance was obtained without disclosing the material facts. In such circumstances, we are inclined to think that the appellant was justified in repudiating the contract.

#29. The Cross Objection is filed by the second respondent being dissatisfied with the amount ordered to be paid by the learned Company Judge. There is objection taken on behalf of the appellant that a Cross Objection itself will not lie at the instance of the second respondent. This is for the reason that under Section 45 of the Companies Act, it is not open to the second respondent to maintain a Cross Objection. We find merit in the said contention. Of course, Shri Chacko George, learned senior counsel would contend that even if a Cross Objection may not be maintainable, it is open to the Appellate Court under Order 41 Rule 33 of the CPC, to grant the relief sought in Co.A.No. 31 of 2003 35 the Cross Objection. We have already found that the Appeal itself has to be allowed and the Company Application has to be rejected. In such circumstances, we do not see any reason to even consider the claim for an enhanced amount. Accordingly, we allow Company Appeal No.31 of 2003 and set aside the order of the learned Company Judge and dismiss the Company Application No.404 of 1998 in C.P.No.1 of 1996. The Cross Objection also will stand dismissed. There will be no order as to costs. (K. M. JOSEPH) Judge (M.L. JOSEPH FRANCIS) Judge