Case: The Neptune Assurance Company Limited &amp; Others Vs. Union of India &amp; Another

The petitioners are three in numbers, viz., the company and two Directors and shareholders2. The petitioners asked for a declaration that the order dated 13 May 1971 made in exercise of powers conferred by Section 4 (1) of the General Insurance (Emergency Provisions) Ordinance 1971 and the directions dated 13 May 1971 given by virtue of powers conferred by Section 4 (3) of the General Insurance (Emergency Provisionse 1971 are illegal3. The paid up capital of the Neptune Assurance Company referred to as the company is Rs. 10,00,000. The petitioner Jalan is a Director of the company. He holds 16,725 ordinary shares of the face value of Rs. 20 each. The petitioner Goenka is a Director of the company. He holds 2,000 ordinary shares of the face value of Rs. 20 each4. The company carried on business as general insurers consisting of fire and miscellaneous insurance business. In the month of September 1970 about 2343 insurance policies of the company were in force. On 17 September 1970 the Board of Directors of the company resolved that the company would cease to underwrite any insurance business as from the close of business hours on 30 September 1970. On 30 September 1970 the company wrote to the Controller of Insurance about the decision of the company to cease to do business as on the close of business on 30 September 1970. The company returned its registration certificate for the current year to the Controller of Insurance. After close of business on 30th September 1970 the company stopped doing all insurance business5. On 3rd October, 1970, the Controller of Insurance returned to the company its registration certificate. The Controller pointed out that there was no provision for return of certificate. The Controller advised the company not to apply for renewal of registration certificate for the year 19706. In the month of October, 1979, there was an agreement between the company and the New Great Insurance Company of India Ltd. referred to as the New Great in respect of an intended transfer of the entire business of the company to the New Great. The agreement provided inter alia the following features. Before transfer of the entire general insurance business by the company it will obtain the consent of the shareholders at the general meeting for transfer of the general insurance business to the New Great. The company shall prepare a detailed list of all the claims received from policies issued by the company and which claims are outstanding and/or pending on 30th September, 1970, and give the same to the New Great with all particulars7. On 20 October 1970 notice was given that an extraordinary general meeting of the company would be held on 17th November, 1970. The extraordinary general meeting was inter alia to transact the business of the proposal for transfer of the companys insurance business and also of the liabilities in respect of claims relating to the insurance business to the New Great upon the terms recorded in the agreement dated 15th October, 1970. The second business to be transacted at the said extraordinary general meeting was to resolve that pursuant to Section 149 (2-A) of the Companies Act 1956 the company would do business as set out in Clause III, sub-clauses (8) and (9) of the Memorandum of Association of the Company except Banking business. The company thought of investment and finance business. As required by Section 173 of the Companies Act the company gave an explanatory statement of the extraordinary general meeting8. In the month of October, 1970, circular letters were issued to all policy-holders about the company ceasing to underwrite new insurance business with effect from 1st October, 1970. The company sent to all policy holders letters to express their confirmation of the arrangement for taking over the liabilities by the New Great. On 17th November, 1970, there was an extraordinary general meeting of the company. The resolutions which had been notified were passed. It may be stated here that about 50 policy holders demanded cancellation of policies on receipt of circular letters. About 1,389 policy holders did not send any reply. The company advised that they would not be completely discharged from their liabilities unless and until all policy holders agreed to transfer policies to the other insurance company or desired cancellation9. On 2nd February, 1971, there was a resolution of the Board of Directors of the company cancelling the agreement dated 15th October, 1970, entered into with the New Great. There was a second resolution cancelling all policies as from 10/12th March, 1971, after giving due notice to all policy holders. There was a third resolution to terminate all re-insurance treaties both inward and outward from 31st December, 1970. The company and the New Great by mutual consent cancelled the agreement dated 15th October, 1970. In the month of February, 1971, the company issued circular letters to all policy holders effecting cancellation of all policies under relevant clause in each policy. The company refunded to policy holders the sum of Rs. 48,000/- on cancellation of the policies. The uncollected refund amounts to Rs. 2013.9810. On 16th February, 1971, the Controller of Insurance effected cancellation of the registration of the company with effect from 5th April, 1971, under Section 3 (4) (F) of the Insurance Act, 193811. On 22nd February, 1971, the company gave letters to Indian Guarantee and Central Insurance Co. and M/s. India Re-Insurance Corporation Ltd., cancelling all re-insurance treaties with effect from 31st December, 197048. There are three petitioners in this petition under Article 32 of the Constitution : (1) The Neptune Assurance Company Ltd., (2) Sanwar Prasad Jain and (3) Krishna Murari. The first petitioner is a public company incorporated under the Indian Companies Act. The second and third petitioners are shareholders and Directors of the first petitioner (hereinafter called the Neptune Assurance). The Union of India, the first respondent, appointed a Custodian over the undertaking of the Neptune Assurance under Section 4 of the General Insurance (Emergency Provisions) Ordinance, 1971 on May 13, 1971. The said Ordinance was eventually re-enacted as General Insurance (Emergency Provisions) Act, 1971 (hereinafter called the Act). The Custodian appointed under the Ordinance is continuing to manage the undertaking by virtue of Section 4 of the Act49. The Union of India also issued certain directions on May 13, 1971. Those directions regulate the management of the undertaking of the Neptune Assurance by the Custodian. The petitioners challenge the validity of the aforesaid order and directions. They also question the constitutionality of a part of Section 2 (e) and Section 15 (a) of the Act. They pray for the quashing of the aforesaid order and direction and for a direction to the respondents to hand over charge of the undertaking of the Neptune Assurance to the petitioners50. Upto the end of March, 1971, the Neptune Assurance was registered under the Indian Insurance Act, 1938. The registration authorised it to carry on the business of general insurance comprising fire and miscellaneous insurance. On September 17, 1970, its Board of Directors resolved that it would cease to underwrite any insurance business as from the close of business hours on September 30, 1970. On that very date it informed the Controller of Insurance of the resolution and returned its certificate of registration for the year 1970 to the Controller of Insurance. After the close of business on September 30, 1970, it stopped doing any kind of general insurance businessOn October 3, 1970, the Controller of Insurance returned the registration certificate to it with the remark that there was no provision in the Insurance Act for return of a certificate. The Controller advised it not to apply for renewal of certificate for the year 1971In October, 1970 there was an agreement between it and the New Great Insurance Company of India Ltd. with respect to transfer of its entire business to the New Great Insurance Company of India Ltd. On October 20, 1970 notice was given to the shareholders of the Neptune Assurance that an extraordinary general meeting would be held on November 17, 1970 to consider the proposal of transferring its insurance business and liabilities to the New Great Insurance Company of India Ltd. The agenda of the meeting included certain other matters for consideration. It is not necessary to mention them53. OnNovember 17, 1970, in the extraordinary general meeting the aforesaid resolution regarding transfer of business and liabilities was passed. In the month of October 1970 a letter was sent to all the policy-holders informing them that the Neptune Assurance had ceased to underwrite new insurance business with effect from October 1, 1970. It also sought their approval to transfer of business and liabilities of the Neptune Assurance to the New Great Insurance Company of India LtdAbout 50 policy-holders demanded cancellation of the policies. About 1389 policy-holders did not send any reply. It appears that the Neptune Assurance was advised that it would not be completely discharged from its liabilities unless and until all the policy-holders had agreed to the transfer of its business and liabilities to the New Great Insurance Company of India Ltd. So on February 2, 1971, the Board of Directors of the Neptune Assurance cancelled the agreement with the New Great Insurance Company of India Ltd. The Board of Directors also passed a resolution cancelling all policies with effect from March 10/12, 1971 after giving due notice to the policy-holders. Another resolution was passed terminating all reinsurance treaties, both inward and outward, with effect from December 31, 1971As the agreement was cancelled, it did not have any effect. In February, 1971, the Neptune Assurance issued circular letters to all policy-holders cancelling the policies in accordance with the cancellation clause in each policy. The Neptune Assurance refunded to policy-holders a sum of Rs. 48000/- on cancellation of their policies. The uncollected refund amount comes to Rs. 2013.98On February16, 1971, the Controller of Insurance cancelled the registration of the Neptune Assurance with effect from April 5, 1971. He cancelled the registration under Section 3 (4) (f) of the Insurance Act.On February22, 1971, the Neptune Assurance sent letters to the Indian Guarantee and General Insurance Company and M/s. India Re-Insurance Corporation Ltd. cancelling all re-insurance treaties with effect from December 31, 197057. TheNeptune Assurance reduced its staff from the month of September, 1970. By the end of February, 1971 the total staff consisted of one officer, one clerk, one typist and one peon. The total emoluments of the staff upto September, 1970 were Rs. 7179.18 per month, but after that month they have come down to Rs. 1154.20 per monthIt is not disputed that many claims which had accrued before the cancellation of policies are still outstanding against the Neptune Assurance. Some cases are pending in courts with respect to some of them.

Reasoning: To sum up, the word insurer in Section 15 (a) of the Act includes only two classes of persons : (1) a public company incorporated under the Companies Act; and (2) a public company incorporated under a foreign Company LawA company is a creature of statute. Its birth, progress, and extinction are all controlled by the statute. As the Neptune Assurance is carrying on the business of general insurance, it is controlled by the Insurance Act read with the Companies Act. Section 54 of the Insurance Act provides for the voluntary winding up of an insurance company. According to it, an insurance company may be voluntarily wound up only in three circumstances. Those circumstances are : (1) amalgamation, (2) reconstruction of the company; or (3) the inability to carry on business on account of its liabilities. Section 58 (1) of the Insurance Act provides for the winding up of only a class of an insurance business of a company in certain circumstances provided a scheme for that purpose is submitted to and confirmed by the Court. The Neptune Assurance has not claimed before us that it is being wound up under Section 54 or Section 58. The Neptune Assurance could not voluntarily be wound up otherwise than in accordance with Section 54. It is accordingly difficult to comprehend the argument that the cessation of business by the Neptune Assurance means voluntary winding up of its business. This kind of voluntary winding up of business is unknown to the Insurance Act73. It issaid that our construction makes redundant the word "business" in Section 15 (a). But there is no redundancy. A company which is being would up voluntarily or by the court may, without the least violence to language, be described as a company whose business is being voluntarily wound up or is being wound up by the Court. Winding up of a company is, in effect, the same as the winding up of the entire business of the company. Both expressions in substance convey the same sense. Moreover, the expression " any insurer whose business is being wound up by the court" is more appropriately applicable to the context of a foreign company whose business in India is being wound up by the Court under Section 584 of the Companies Act, 1956. The expression "any insurer who is being wound up by the court" could not be appropriate in its application to a foreign company because the business of that company outside India cannot be wound up by an order of the Court in India. Its entire business in India may be wound up. That may be a reason for introducing the word "business" in Section 15 (a). Section 481 of the Companies Act, 1956 provides that "when the affairs of a company have been completely wound up", the court shall make an order that the company be dissolved from the date of the order. Upon that order the company shall stand dissolvedSection 15 (b) of the Act provides that the Act shall not apply to any insurer to whom the Insurance Act does not apply by reason of Section 2-E thereof. Section 2-E of the Insurance Act provides that it shall not apply to any insurer as defined in paragraph (i) and (ii) of sub-clause (a) of clause 9 of Section 2 in relation to any class of insurance business where the insurer has ceased before the commencement of that Act to enter into new contracts of that class of business. Section 2 (9) (a) (i) and (ii) of that Act includes in the definition of insurer a public company incorporated under a foreign law and carrying on business in India or having its principal place of business or domicial in India. If such a company has ceased before the commencement of the Insurance Act to enter into any new contracts of insurance business or a class of insurance business, as the case may be, it shall not be governed by the provisions of the Insurance Act. According to Section 15 (b) of the Act such a company shall also not be governed by the Act. Thus Section 15 (b) refers to a foreign insurance company which had ceased to do insurance business or class of insurance business in India before the commencement of the Insurance Act. Section 2 (e) of the Act excludes from the definition of insurer an insurance public company whose registration under the Insurance Act has remained wholly cancelled for a period of six months immediately before May 13, 1971. We have already discussed that the registration of an insurance public company may be cancelled by the Controller if the Company has not applied for the renewal of its registration. One of the reasons for not so applying may be cessation of business. So Section 2 (e) also refers to an insurance public company which has ceased to do business for a certain periodSection 15 (a) should be construed in the setting of Section 15 (b) and Section 2 (e). So construed, it is difficult to believe that Parliament has not used the expression "whose business is being voluntarily wound up" in the technical sense. If Parliament had intended to exempt from the operation of the Act an insurance public company which has of its own accord ceased to do business before the commencement of the Act, it would have inserted in the Act a clear provision like Section 15 (b) or Section 2 (e). Now the deliberate insertion of Section 15 (b) and Section 2 (e) necessarily implies that Parliament did not intend to exclude an insurance public company which has merely ceased to do business of its own accordScheme. One of the professed objects of the Act is "to protect the interest of the policy-holders pending nationalisation of the general insurance business". The interpretation suggested by the Neptune Assurance would defeat that legislative object. Assuming that Section 15 (a) is susceptible of two meanings - the wider and the narrower (the technical), the one which fructifies the said legislative object should be preferred. This preference is also made persuasive by the nature of the provisions of Section 15 of the Act. Section 15 carves out an exception to Section 15 carves out an exception to Section 3. It excludes certain insurance public companies and some other institution from the operation of the Act. Ordinarily an exception is strictly construed. So the technical meaning of the expression "whose business is being voluntarily wound up" should be preferable to the wider meaning of that expression77. Inthe light of the foregoing discussion we are of opinion that the Neptune Assurance cannot get the benefit of Section 15 (a) and will be subject to the provisions of Section 3 of the Act which provides for the takeover of the management of the insurance companiesIt is not and cannot bedenied that an insurance company whose registration under the Insurance Act has remained wholly cancelled for six months immediately before the appointed day is in one very important respect radically unlike the insurance company whose registration under the Insurance Act has remained wholly cancelled for less than six months immediately before the appointed day. An insurance company whose registration under the Insurance Act has remained wholly cancelled for more than six months from the appointed day has become defunct. It cannot be revived. It may be wound up by the Court on the application of the Controller under Section 3 (5D) of the Insurance Act. An insurance company whose registration under the Insurance Act has remained wholly cancelled for less than six months from the appointed day is a state of suspended animation. It can revive itself. The Controller cannot make an application to the Court for its winding up. The temporal differentia as to the cancellation of registration between the two classes of companies determines the liability of one of them to be wound up under Section 3 (5D). This is a meaningful and intelligible differentia. It is not arbitary, whimsical, or illusory. The differentia has got rational relation to one of the objects of the Act. According to the preamble, the protection of the interests of the policy holders is an object of the Act. The differentia is calculated to accomplish this legislative object. Where the registration of a company has remained wholly cancelled for six months from the appointed day, the Controller may apply to the Court for its winding up under Section 3 (5D). As soon as the judicial process is set in motion, the company comes under the control of the Court. A liquidator will be appointed to wind up its affairs. The Courts control will protect those policy-holders who have got unsatisfied claims against the company. The liquidator will collect the assets of the company and pay those claims as far as possible from the realised assets. The company whose registration has remained wholly cancelled for less than six months from the appointed day can revive itself. It cannot be wound up by the Court at the instance of the Controller. The claims of the policy-holders against such a company will go unprotected. The company may or may not pay the claims. It may fritter away its assets. The policy-holders would be constrained to resort to litigation against the company for the realisation of their claims against it. The take-over of the undertaking of the company under the Act improves by reason of Governments management the prospects of their claims satisfaction. It is also calculated to protect all interests by applying after the take -over, if that course is deemed necessary, to revive the business of the company. Section 2 (e) is in our view not discriminatoryFor the foregoing reasons, Section 15 (a) also is not discriminatoryAs in our view the attack based on Art. 14 cannot succeed, it is unnecessary to deal with the respondents contention based on Art. 31-A (b) and (d) of the Constitution.