Case: Damji Valji Shah And Another Vs. Life Insurance Corporation Of India &amp; Ors

2. The facts of the case briefly are these. The company was a composite insurer i.e., an insurer who carried on, in addition to life insurance business, other classes of insurance business. The LIC Act came into force on July 1, 1956 and the Corporation was established on September 1, 1956 which was the appointed day according to S. 2(1) of that Act. On that day, in view of S. 7, all the assets and liabilities appertaining to the life insurance business [called the controlled business vide S. 2(3)] of the company stood transferred to and vested in the Corporation. It was found that certain amounts which had been transferred from the Life Insurance Fund in the books of the company to the General Department had not been transferred in accordance with the provisions ofthe Insurance Act, 1938 (Act IV of 1938) which governed the company and should have continued to be included in the assets appertaining to the controlled business of the company. It was therefore that an application under S. 15 of the LIC Act was made by the Corporation to the Tribunal.3. We may now state how this amount of Rs.82,000 happened to be transferred from the Life Insurance Fund (or the Life Fund) of the company to its General Department. The company had to keep separate accounts of all receipts and payments in respect of each class of insurance business, in view of S. 10 (1) of the Insurance Act. It had to maintain a Life Fund in connection with its life insurance business in view of S. 10(2). Sub-s. (2) provided that where an insurer carried on business of life insurance, all receipts due in respect of such business be carried to and would form a separate fund called the Life Insurance Fund and its assets be kept distinct and separate from all other assets of the insurer and deposits made by the insurer in respect of life insurance business. Sub-s. (3) of S. 10 provided that the life insurance fund would be as absolutely the security of the life policy holders as though it belonged to an insurer carrying on no other business than life insurance business and that it should not be applied directly or indirectly for any purpose other than those of the life insurance business of the insurer. The amount in this fund had to be sufficient to meet the net liabilities in regard to the life insurance policies issued by the company. If it was not so maintained, the company stood the chance of being barred from carrying on life insurance business.4. By resolution dated December 18, 1948, Rs. 1,10,000 were transferred from the General Department to the Life Department as advance to the Life Department Revenue Account for being added to the Life Fund, subject to the condition that the Life Department would not be liable to pay any interest thereon and that no repayment of the loan would be made except out of the valuation surplus of the Life Department. The first actuarial valuation report of the company for the year 1944-48, dated July 18, 1949, showed that the net liability of the company was Rs.6,55,718 and that the amount in the Life Fund was Rs.6,57,450 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 transferred to the Life Department Revenue Account prior to December 31, 1948, this valuation report would have shown the net liability exceeding the amount in the life fund by about a lakh of rupees. It is clear that the amount was so transferred in order to avoid the consequences of the net liabilities exceeding the Life Fund.5. The Profit and Loss Appropriation Account for the year 1949 shows that Rs. 60,000 out of this amount of Rs. 1,10,000 was written off as the company had made profits, Rs.32,000 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.6. The second actuarial valuation report for the period 1949-52, dated September 9, 1953, showed that the policy liability amounted to Rs.15,33,068 that the Life Fund stood at Rs.15,35,890 and that thus the Life Fund exceeded the net liability 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 30, 1953 whichthat a loan of Rs.32,000 (thirty two thousand only) bearing no interest be hereby given to Life Department by General Department with retrospective effect as on 31st 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 written off from the future profits of the General Department. This will have effect in the accounts of the Company for the year ended 31st Decemberis to be noted that this resolution itself said that the amount would be repaid only out of the future Valuation Surplus or surpluses of the Life Department or might be written off from the future profits of the General Department.7. 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 resolutionthat a loan of Rs.82,000 (eighty two thousand only) advanced to Life Department Revenue Account by General Department be and is hereby repaid to General Department and the balance of Rs.60,000 due to General Department by Life Department Revenue Account be and is hereby kept in reserve for future and hence no adjustments in regard to Rs.60,000 will be made for the present". This resolution was confirmed by the Board of Directors at its meeting dated February 6, 1956.We may now refer to the changes in law with respect to life insurance business in 1956 and an anticipation of which probably led to the resolution of January 6, 1956. On January 19, 1956, the Life Insurance (Emergency Provisions) Ordinance, 1956 (Ord. No. 1 of 1956) was promulgated by the President. It came into force 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. Clause (b) of sub-s. (3) prohibited the incurring of any expenditure by the insurer without the previous approval of the person specified by the Central Government in that behalf, from the assets appertaining to the controlled business otherwise than for the purpose of making routine payments etc., specified in that clause. Those 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 prohibited the insurer, without the previous approval of the authorised person to transfer or otherwise dispose of any such assets appertaining to the controlled business or create any charge or hypothecation, lien or other encumbrance thereon. It would therefore appear that possibly the Board of Directors 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.9. We have already referred to the coming into force of the LIC Act on July 1, 1956 and of the transfer and vesting in the Corporation of all the assets and the liabilities pertaining to the life insurance business in view of S. 7 of that Act. Section 15 provides that the Corporation may apply for relief to the Tribunal in respect of a transaction which is made by the insurer whose controlled 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 consideration or for an inadequate consideration and the transfer was not reasonably necessary for the purpose of the controlled business of the insurer or was made with an unreasonable lack of prudence on the part of the insurer regard being had in either case to the circumstances at the time. The Corporation, in such proceedings, had to make all parties to the transaction parties to the application.10. Sub-s. (2) of S. 15 empowered the Tribunal to make such order against any of the parties to the application as it thought just having regard to the extent to which those parties were respectively responsible for the transaction or benefited from it and all the circumstances of the case. Section 16 provided for the payment of compensation to the insurer whose controlled 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 adjudicate upon any matter which a Tribunal was empowered to decide or determine under the Act. Section 44 inter alia 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.11. The Corporation by its application under S. 15, contended that the transfer of Rs. 82,000 from the Life Fund to the General Department under the resolution of January 6, 1956, was illegal, being contrary to and in contravention of the Insurance Act and as such was inoperative, bad in law and not binding on the petitioner. It was further contended that the said transfer was without consideration and was not reasonably necessary for the purpose of the controlled business of the company and/or was made with unreasonable lack of prudence on the part of the company, regard being had to the circumstances at the time. It was therefore that it prayed inter alia for a decree against the respondents for a sum of Rs.82,000 with interest. It impleaded the company as respondent 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 No. 2. Ghanshyamdas and Dumji 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.12. The aforesaid three directors, the appellants before us, contested the claim of the Corporation and justified the transfer of Rs. 82,000 to the General Department from the Life Fund on the ground that the amount had been lent by the General Department to the Life Department and had been paid back to the General Department by transfer from the Life Fund when the Life Fund showed surplus, according to the report of the Actuary dated July 25, 1955. It was also contended before the Tribunal that the petition could not be proceeded with without the leave of the Bombay High Court in view of S. 446 of the Indian Companies Act and that the petition was also not maintainable by reason of S. 44 of the LIC Act. Several other grounds were also taken before the Tribunal. We are not now concerned with them.13. The Tribunal held that the amounts of Rs. 1,10,000 and Rs. 30,000 were not advanced to the Life Department as loans and that the transfer of Rs. 82,000 was not out of the valuation surplus and that therefore the transfer of this amount could not be said to be for consideration and necessary or reasonably necessary 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 petition was maintainable and that S. 44 of the LIC Act did not bar 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 1 to 4, to pay to the Corporation jointly and severally a sum of Rs. 82,000 together with interest thereon at 6 per cent per annum from September 1, 1956 till full payment. 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 Ghanshamdas. This judgment will govern both these appeals.

Court's reasoning:
22. We are, therefore, of opinion that the Tribunal had jurisdiction 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. 11 (a), L. I. C. Act, do not in any way affect its jurisdiction to continue the proceedings.23. We now come to the third point raised for the appellants. We agree with the Tribunal that the amount of Rs. 1,10,000 and Rs. 32,000 were not lent to the Life Department as such by the General Department. No question of lending money by one department of the company to the other can be ordinarily contemplated. The assets of the company really constitute one entity, even though the company maintains separate accounts with respect to its various insurance businesses. It carried on other types of insurance business also. We have already shown how the provisions of the Insurance Act require the company to keep a separate account for the insurance business and to have a separate fund known as the Life Insurance Fund and to which were to be credited all 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 each or in approved securities or partly in cash and partly in approved securities the sums specified in the various clauses in regard to the different types of life insurance businesses. Clause (a) requires a deposit of Rs.2,00,000 where the business done or to be done is life insurance only. Clause (e) requires a deposit of Rs.3,00,000 where the business done or to be done is life insurance and any one of the three-classes of business mentioned in Cls. (b) to (d). Clause (e) further provides that out of the deposit o 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 deposits under S. 7. Section 8 (2), however, deals with any deposit and provides that where a deposit is made in respect of life insurance business, the deposit made in respect thereof shall not be available for the discharge of any liability of the insurer other than liabilities arising out of policies of life insurance issued by the insurer. 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 for the discharge of liabilities of the insurer arising out of life insurance policies issued by him.In the circumstances, we cannot resist the conclusion that the Directors passed a resolution for the transfer of this amount on January 6, 1956 in anticipation of some law depriving the company of its life insurance business. It may be that it was a close secret that an Ordinance would be issued on January 19. But all the same, possibly persons in the insurance world could have had an inkling of the trend of events.32. The content of the resolution passed on January 6, indicates that the directors had no clear idea at the time as to how much the Life Department, according to them owed to the General Department. The resolution speaks not only of the transfer of Rs. 82,000 to the General Department but also refers to the balance of Rs.60,000 due to the General Department by the Life Department Revenue Account. The amount had been written off in 1950 and could not have thereafter been considered to be a loan advanced to the Life Department Revenue Account from the General 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 to the General Department from the Life Department Revenue Account. Any way, such a resolution of the Directors indicates that any entries with respect to the alleged loans were made for the purpose 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 exceed the net liabilities of the Company on account of the life insurance policies.33. We are, however, 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 January 6, 1956, was not in accordance with the provisions of the Insurance Act and that consequently that amount continued to form part of the assets of the life insurance business of the company upto September 1, 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 in the Generalcontention 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.The word insurer is defined in Cl. (6) of S. 2 of the L.I.C. Act and means an insurer as defined in the Insurance Act who carries 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 on that date. Its life insurance business 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 and cannot take advantage of the provisions of Cl. (a) of S. 44 of the L. I. C.it does not appear that 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 abstract in Form I, Fourth Schedule was prepared and submitted to the Controller. Further, the letter shows that the net working surplus was only Rs. 58,733 as the ostensible surplus of Rs.1,12,033 included Rs.53,300 by which certain investments 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 accordance with the terms on which the alleged loan 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 Department but this does not mean that the Life Department was bound to pay back the amount the moment it had any valuation surplus. 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.