IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.M.JOSEPH & THE HONOURABLE MR. JUSTICE M.L.JOSEPH FRANCIS FRIDAY, THE 4TH DECEMBER 2009 / 13TH AGRAHAYANA 1931 Co. Appeal. No. 31 of 2003(A) & CROSS OBJECTION NO. 93 OF 2005 --------------------------- AGAINST THE ORDER IN CA 404/98 IN CP.1/1996 Dated 08/01/2003 .................... APPELLANT: 1ST RESPONDENT ----------------------------------- THE NEW INDIA ASSURANCE CFOMPANY LTD., REPRESENTED BY THE REGIONAL MANAGER, REGIONAL OFFICE, M.G.ROAD, KOCHI-11 BY ADV. SRI.SAJI VARGHESE RESPONDENT(S): APPLICANT AND 3RD RESPONDENT ------------------------------------------- 1. THE OFFICIAL LIQUIDATOR, HIGH COURT OF KERALA, ERNAKULAM 2. S.P.SINGH (EX-VICE PRESIDENT OF THOSHIBA ANAND BATTERIES LTD., IN LIQUIDATION) JARPREM, SHANTHI NAGAR, KADAVANTHRA, KOCHI-20 ADV. SRI.K.MONI FOR R SRI.CHACKO GEORGE (SR) FOR R1 & 2 SRI.H.RAMANAN FOR R1 THIS COMPANY APPEAL HAVING BEEN FINALLY HEARD ON 17/09/2009, ALONG WITH CO NO. 93 OF 2005 THE COURT ON 04/12/2009 DELIVERED THE FOLLOWING: ORDER ON I.A. NO. 2173/2003 IN COA NO. 31 OF 2003 DISMISSED SD/- K.M.JOSEPH, JUDGE SD/- M.L.JOSEPH FRAANCIS, JUDGE 4.12.2009 /TRUE COPY/ K. M. JOSEPH & M.L. JOSEPH FRANCIS, JJ. - - - - - - - - - - - - - - - - - - - - - - - - - - Co.A.No. 31 of 2003 & Cross Objection No. 93 of 2005 - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 4th day of December, 2009 JUDGMENT Joseph Francis, J. This Appeal is filed by the first respondent in C.A. 404 of 1998 in C.P. 1 of 1996 in the matter of M/s. Thoshiba Anand Batteries Ltd. against the order of the learned Single Judge dt.8.1.2003. 2. The facts of the case are briefly as follows: On behalf of M/s. Thoshiba Anand Batteries Ltd., a company under liquidation (hereinafter referred to as the Company), the Official Liquidator filed an application for directing the appellant herein (1st respondent in the application), the New India Assurance Company Ltd., to settle the claim made by the company on the basis of the fidelity insurance policy No.4676401005165 issued in favour of six employees of the company and other amounts involved in the insurance scheme Co.A.No. 31 of 2003 2 and also for directing the second respondent therein, M/s. Rashmi Desai and Associates, Bombay to submit the survey report to the first respondent. 3. The Company was ordered to be wound up by this Court on 5.11.1996, on the basis of the opinion furnished by the BIFR and the Official Liquidator had been appointed as the Liquidator of the company. While proceedings for winding up were going on, the former Vice President of the company (2nd respondent herein) had informed by letter dt.18.12.1996 that the company had lodged an insurance claim before the Alwaye branch of the appellant, in respect of six employees of the Bombay Branch of the Company, viz. M/s. G.K. Anand, P.K. Anand, R.K. Sharma,S.K. Bansal, V. Sabharwal abd A. Sabharwal, who have caused loss to the company by way of falsification of accounts, misappropriation of goods and sales proceeds. The above mentioned employees were covered under the fidelity insurance policy scheme. Later, the appellant had appointed the Co.A.No. 31 of 2003 3 second respondent, surveyors, assessors and valuers, Bombay to verify and submit a report regarding the claim. 4. On receipt of the letter from the third respondent, the Official Liquidator had addressed the Divisional Manager of the appellant requesting them to furnish the present position of the fidelity insurance policy claim. The total amount claimed by the company under the fidelity insurance scheme was Rs.19,58,584.99 as against the amount of Rs.21 Lakhs insured in respect of the aforementioned employees. Further, the company made another claim before the insurance company under the fidelity guarantee insurance scheme for Rs.7.14 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 from 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