Case Law Companies Act DAMJI VALJI SHAH AND ANOTHER Vs LIFE INSURANCE CORPORATION OF INDIA & ORS

PETITIONER:
DAMJI VALJI SHAH AND ANOTHER

Vs.

RESPONDENT:
LIFE INSURANCE CORPORATION OF INDIA & ORS.

DATE OF JUDGMENT:
08/04/1965

BENCH:
DAYAL, RAGHUBAR
BENCH:
DAYAL, RAGHUBAR
GAJENDRAGADKAR, P.B. (CJ)
HIDAYATULLAH, M.
RAMASWAMI, V.

CITATION:
1966 AIR 135 1965 SCR (3) 665
CITATOR INFO :
RF 1972 SC 878 (2)
ACT:
Life Insurance Corporation Act. 1956, ss. 15 and
44(a)–Indian Companies Act, 1956, ss. 446(1)–Application
by Life Insurance Corporation under s. 15 of L.I.C.
Act–Defendant company ordered to be wound-up by
court–Permission of High Court under s. 446(1) of Companies
Act whether necessary for proceeding with applications under
s. 15.

 

HEADNOTE:
Indian Insurance Act, 1938 s. 10–Transfer of Funds from
Life Insurance Fund to General Department of composite
insurer–Permissibility.
The appellants were directors of an insurance company
which was a composite insurer i.e. one carrying on other
classes of life insurance business besides life insurance.
Under s. 10(1) of the Indian Life Insurance Act, 1938, a
composite insurer had to keep separate accounts in respect
of the different classes of business, and its receipts in
respect of life insurance business had to go into a fund
called the Life Insurance Fund which could be applied only
for the put the Life Insurance business and had always to be
sufficient to meet the net liabilities of the Life Insurance
business. By resolution dated December 18, 1948, a sum of
Rs. 1,10,000 was transferred from the General Department of
the company to the Life Department to be added to the Life
Fund; if this had not been done the said fund would have
shown a deficit in the actuarial valuation report dated July
18, 1949. In the profit appropriation account of the company
for the latter year a sum of Rs. 60,000 out of the above sum
was written off so that the sum advanced was reduced to Rs.
50,000. A further sum of Rs. 32,000 was again similarly
transferred from the General to the Life Department by
resolution passed in August 1953. with retrospective effect
from December 31, 1952, in order to strengthen the
position of the Life Fund which again would have shown a
deficit if this had not been done. The advances thus made on
both occasions were according to the relevant resolutions
repayable only out of the ‘valuation surplus’, if any,’ in
the life department. On January 8, 1956, the Board of
Directors of the company transferred a sum of Rs. 82,000
from the Life Department to the General Department. by way
of repayment of the above loans. On January 19, 1956, by
Ordinance No. 1 of 1956 the management of the life
insurance business of all insurers in the country passed to
the Central Government. On September 1. 1956, the Life
Insurance Corporation of India came into being under the
Life Insurance Corporation Act, 1956, and the assets and
liabilities of the life insurance business carried on by all
insurers became vested in it. The corporation filed an
application under s. 15 of the said Act before the Tribunal
constituted under the Act alleging that transfer of Rs.
82,000 from the Life Department to the General Department of
the aforesaid company was without consideration and not for
any 665
666
necessity of the life insurance business and prayed for a
decree against appellants and the company jointly and
severally for the said amount. The Tribunal overruled the
defendants’ objections as to its jurisdiction and granted a
decree to the Corporation as prayed. The company did not
appeal but the appellants came to this Court by special
leave.
The following contentions were raised on behalf of the
appellants; (1) The tribunal had no jurisdiction to proceed
with the proceedings on the petition presented by the
Corporation without the leave of the High Court in view of
s. 446 of the Companies Act, 1956, the Company having been
ordered to be wound up the High Court on November 9, 1959;
(2) In view of s. 44(a) of the L.I.C. Act none of the
provisions of the Act applied to the company and therefore
the Tribunal could not proceed on the application of the
Corporation subsequent to the company being wound-up; (3)
The transfer of Rs. 82,000 from the Life Fund to the General
Department of the company was for consideration and was
necessary for the life insurance business.
HELD: (i) The provisions of s. 446 of the Companies Act
did not affect the proceedings before the Tribunal.
It is in view of the exclusive jurisdiction conferred
upon the company court in sub-s. (2) of s. 446 of the
Companies Act to entertain and dispose of any suit or
proceeding by or against a company which is being wound-up
that provision has been made in subs. (1) of that section
that no suit or proceeding shall be filed, or if pending,
proceeded with against such a company without permission
having been taken from the Court. In view of the provision
in s. 41 of the L.I.C. Act the company court has no
jurisdiction to try matters which a Tribunal under the
Companies Act is empowered to entertain and decide. It could
not be disputed that the Tribunal was empowered to try the
Corporation’s application under s. 15 and the Company Court
therefore had no jurisdiction to entertain or decide it. It
must follow that the consequential provision of sub-s. (1)
of s. 446 would not operate on the proceedings before the
Tribunal. [673E-G]
Further, the provisions of the Special Act i.e. the
L.I.C. Act will over-ride the provisions of the general Act
viz. the Companies Act which is an Act relating to companies
in general. [673H]
(ii) The company could not take advantage of the
provisions of s. 44(a) of the L.I.C. Act. [674D-E]
Section 44(a) provides that the provisions of the Act
will not apply to an insurer whose business is being wound-
up under orders of court. But the question of the
applicability of the Act to a particular insurer is to be
considered in relation to facts existing at the time when
the Act came into force i.e. July 1, 1956 or on the
appointed day, i.e. September 1, 1956, when the assets and
liabilities of the controlled insurer of the company stood
transferred and vested in the Corporation. The company was
not being wound-up under orders of Court on the above dates.
The L.I.C. Act and therefore s. 41 thereof did apply to the
company. It could not cease to apply merely because
subsequently the company was ordered to be wound-up. [673H-
674B]
Section 44(a) was not applicable to the company for the
further reason that when it was ordered to be wound-up in
1959 it was not an ‘insurer’ within the meaning of that word
in s. 2(6) since it was not carrying on life insurance
business on that date. the said busi-
667
ness having been taken over by the Corporation on the
‘appointed day’ [674C-D]
(iii) The Tribunal rightly passed a decree in favour of
the Corporation.
No question of lending money by one department of the
company to the other can ordinarily be contemplated. The
assets of the company really constitute one entity even
though the company maintains separate accounts with respect
to its various insurance businesses. From the facts it was
clear that the amounts of Rs. 1,10,000 and Rs. 32,000 had
been transferred from the General Department to the Life
Fund to meet the deficit in the Life Fund which was likely
to occur on both occasions. The circumstances showed that
the sum of Its. 82,000 was transferred back to the General
Department in a hurry in anticipation of some law depriving
the company of its life insurance business. It was moreover
a condition of the alleged ‘loans’ that they would be
repaid only when there. was a ‘valuation surplus’ in the
Life Fund. There was no such surplus in the Life Fund at the
time when the sum was transferred from it the General
Department. [674G]

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 676 and
677 of 1962.
Appeals by special leave from the judgment and order
dated February 2,7. 1960 of the Life Insurance Tribunal,
Nagpur in Case No. 30 / XII of 1959.
O.P. Malhotra, Hamendra K. Shah, .1. B. Dadachanji, O.C.
Mathur and Ravinder Narain, for the appellants (in C.A. No.
767/ 62).
H.M. Thakar, S.N. Andley, Rameshwar Nath and P.L. Vohra,
for the appellant (in C.A. No. 677/62).
C.K. Daphtary, Attorney-General, D.P. Mehta and K.L.
Hathi, for respondent No. 1 (in both the appeals).
The Judgment of the Court was delivered by
Raghubar Dayal, J. These appeals, by special leave, are
against the decree of the Life Insurance Tribunal, Nagpur,
in proceedings on an application by the Life Insurance
Corporation of India (hereinafter called the Corporation)
under s. 15 of the Life Insurance Corporation Act, 1956 (Act
XXXI of 1956), shortly termed as the LIC Act, for ordering
the Vishwabharti Insurance Company, Bombay. Damji Valji Shah
and Jayantilal Hirijibhai Chawda, appellants in the C.A.
676 of 1962, Ghanshyamdas, appellant in C.A. 677 of 1962,
the aforementioned individuals being directors of the
Vishwabharti Insurance Company, and another director, to pay
to the Corporation jointly and severally the sum of Rs.
82,000/- together with interest there at 6 % per annum from
September 1, 1956, till full payment. The decree ordered the
company to pay a further sum. but we are not concerned with
that part of the decree as the company has not appealed
against it.
(D)5SCI– 4
668
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 of the Insurance Act 1938
(Act 4 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.
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 m respect of each class of insurance business. in
view of s. 10(1) of the lnsurance Act. It had to maintain d
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 curried to and would form
a separate fund called the Life insurance Fund and its
assets be kept distinct and separate from all other assets
c, If 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.
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 lcan 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
669
1949, showed that the net liability of the company was Rs.
6,55,7 18/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.
The Profit & 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.
The second actuarial valuation report for the period
1949-52, dated September 9, 1953, showed that the policy
liability amounted to Rs. 15,3,3,068, 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 20, 1953 which reads.
“Resolved that 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 31 st December 1952.”
It is to be noted that this resolution itself said that the
amount would be repaid only out of the future Valuation
Surplus or pluses of the Life Department or might be
written off from the future profits of the General
Department.
It was this amount of Rs. 82,000/-(Rs. 50,000,’-
plus Rs. 32,000/-) which, by a resolution dated January 6.
1956 was transferred to the General Department from the Life
Fund. The resolution reads:
“Resolved that a loan of Rs. 82,000/-
(eighty two thousand only) advanced to Life
Department Revenue Account by General
Department be and is hereby repaid to Genera1
Department and the balance of Rs. 60,000/-
670
due to General Department by Life Department
Revenue Account be and is hereby kept in
reserve for future and hence no adjustment in
regard to Rs. 60,000/- will be made for the
present.”
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 a11 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.
We have already referred to the coming into force of the
LIC Act an 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
671
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.
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 business had been transferred to
and vested in the Corporation under the Act. Section 17
provided for the constitution of Tribunals which were
empowered by sub-s. (4) to regulate their own procedure and
decide all matters within their competence. Section 41
provided that no civil Court would have jurisdiction to
entertain or 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.
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 Damji Valji were also parties to the
resolution dated February 7. 1956. Other directors who
were parties to the resolution of January 6 were also
impleaded.
The aforesaid three 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
672
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.
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 Ghanshyamdas. This judgment
will govern both these appeals.
The points raised by learned counsel for the appellants
are: (i) The Tribunal had no jurisdiction to proceed with
the proceedings on the petition presented by the Corporation
without the leave of the High Court in view of s. 446 of the
Companies Act, 1956, the company having been ordered to be
wound-up by the High Court on November 9, 1959, (ii) In view
of s. 44(a) of the LIC Act none of the provisions of the Act
applied to the company and therefore the Tribunal could not
proceed on the application of the Corporation subsequent to
the company being wound-up. (iii) The transfer of Rs.
82,000/- from the Life Fund to the General Department of the
company was for consideration and was necessary for the life
insurance business.
The fourth point sought to be urged was that the
provisions of s. 15(1)(f) of the LIC Act were ultra rites as
they contravened the provisions of Arts. 14 and 19 of the
Constitution. This contention was not raised before the
Tribunal during the arguments and was therefore considered
by it to have been abandoned. We did not therefore allow it
to be raised before us.
Sub-s. (1) of s. 446 of the Companies Act provides that
when a winding-up order has been made or the Official
Liquidator has been appointed as Provisional Liquidator. no
suit or other legal proceeding shall be commenced or, if
pending at the date of the winding-up order, shall be
proceeded with against the company except by leave of the
Court and subject to such terms as the
673
Court may impose. Sub-s. (2) provides. inter alia, that the
Court which is winding-up the company shall, notwithstanding
anything contained in any law for the time being in force,
have jurisdiction to entertain or dispose of any suit or
proceeding and any claim made by or against the company.
Sub-s. (3) provides that any suit or proceeding by or
against the company which is pending in any Court other than
that in which the winding-up is proceeding may, not-
withstanding anything contained in any other law for the
time being in force, be transferred to and disposed of by
that Court. The question is whether these provisions would
affect the proceedings of the Tribunal.
In this connection, reference may be made to s. 41 of
the LIC Act which provides that no civil Court shall have
jurisdiction to’ entertain or adjudicate upon any matter
which a Tribunal is empowered to decide or determine under
that Act. It is not disputed that the Tribunal had
jurisdiction to entertain the application of the Corporation
and adjudicate on the matters raised thereby. The Tribunal
is given the exclusive jurisdiction over this matter.
It is in view of the exclusive jurisdiction which sub-s.
(2) of s. 446 of the Companies Act confers on the company
Court to entertain or dispose of any suit or proceeding by
or against a company or any claim made by or against it that
the restriction referred to in sub-s. (1) has been imposed
on the commencement of the proceedings or proceeding with
such proceedings against a ‘company after a winding-up order
has been made. In view of s. 41 of the LIC Act the company
Court has no jurisdiction to entertain and adjudicate upon
any matter which the Tribunal is empowered to decide or
determine under that Act. It is not disputed that the
Tribunal has jurisdiction under the Act to entertain and
decide matters raised in the petition filed by the
Corporation under s. 15 of the LIC Act. It must follow that
the consequential provision of sub-s. (1) of s. 446 of the
Companies Act will not operate on the proceedings which be
pending before the Tribunal or which may be sought to be
commenced before it.
Further, the provisions of the special Act i.e, the LIC
Act, will over-ride the provisions of the general Act viz.,
the Companies Act which is an Act relating to companies in
general.
It is however contended for the appellants that in view
of s. 44(a) of the LIC Act, s. 41 will not apply to the
company whose business was being wound-up under orders of
Court and that therefore the provisions of s. 446 of the
Companies Act will affect the proceedings before the
Tribunal. The contention is not sound. The question of the
applicablity of the Act to a particular insurer is to be
considered in relation to facts existing when the Act came
into force. In view of s. 44 of the LIC Act it will not
apply to
674
an insurer whose business is being wound-up under orders of
Court at the time when that Act came into force in 1956 or
on the ‘appointed day’ i.e., September 1, 1956. when the
assets and liabilities pertaining to the controlled business
of the company stood transferred and vested in the
Corporation. The company was not being wound-up under orders
of the Court on July 1, 1956 when the Act came into force or
on the appointed day mentioned earlier. The Act did apply
to the company. It cannot cease to apply merely
because subsequently the company was ordered to be wound-up.
The word ‘insurer’ is defined in cl. (6) of s. 2 of the
LIC 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 LIC Act.
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. 44(a), LIC
Act, do not in any way affect its jurisdiction to continue
the proceedings.
We now come to the third point raised for the
appellants. We agree with the Tribunal that the amounts 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 business. 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 life insurance business and to have a
separate fund known as the Life Insurance Fund and to which
were to be creditedreceipts due in respect of the life
business and the amount deposited by the insurer in respect
of life insurance business. Such a deposit is to be made in
view of s. 7(1) of the Insurance Act. This requires’ the
insurer to deposit and keep deposited with the Reserve Bank
of India for and on behalf of the Central Government either
in cash or in approved securities or partly in cash and
partly in approved securities the sums specified in the
various clauses in-
675
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 el. asses mentioned in clauses (b) to (d). Clause (e)
further provides that out of the deposit of Rs. 3,00,000/-,
Rs, 2.00,000/’-shall be the deposit for ‘life insurance
business. Section 7 lays down a statutory amount which the
insurer has to deposit. It does not however restrict the
insurer to deposit a larger amount in respect of life
insurance business. Sectionplaces certain restrictions about
the use to be made of the deposits under s. 7. Section 8(2)
hewever 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.
The amounts of Rs. 1,10,000/- and Rs. 32,000/- would
thus amount to deposits made by the company in respect of
life insurance business in order to augment the life fund.
This can be done either to bring the funds to an amount
exceeding the expected net liabilities on the policies or
merely to augment that fund. It makes no difference to the
company how it distributed its funds so long as its
statutory liabilities were satisfied.
The very conduct of the company with respect to these
amounts belies the alleged nature of the transfers of these
amounts to the Life Department. The sum of Rs.
60,000/-out of Rs. 1.10,000/- was written off in 1949. A
loan of such an amount is not usually written off. No
special reason is assigned for writ
ing off the loan. The resolution about the transfer of
Rs. 32,000,’itself speaks of the possibility of the amount
being written off. A lender does not think in this way at
the time he advances a loan. It is clear that the amount was
really being transferred to the Life Fund through the Life
Department Revenue Account as otherwise the Life Fund on the
actuarial valuation would have stood at a figure much
below the amount of the net liabilities on the
policies as calculated in Form H, Schedule Four to the
Insurance Act, which is a Form giving summary and valuation
of the policies of the company as at the date of the
valuation. Form I is for the valuation balance-sheet of the
company at the corresponding date and requires in one column
the net liability under business as shown in the summary and
valuation of policies and in the other column the balance of
life insurance fund as shown
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in the balance sheet, and also provides for noting the
eventual position about the Life Fund being in surplus or in
deficiency as compared to the net liability. When the amount
was not lent as a loan, no question of its repayment as such
could have arisen in 1956. of course, whenever the Life Fund
showed an actuarial valuation surplus that surplus or part
of it could be transferred to the General Department
according to the desire of the management.
The amount of Rs. 82,000/- was not transferred as a
result of the actuarial valuation as contemplated by the
various resolutions which authorised the transfer of the
amount from the General Department to the Life Department
Revenue Account. It was definitely provided in those
resolutions that no repayment of the amount would be made
except out of valuation surpluses of the Life Department.
The expression ‘valuation surplus’ has a technical
meaning under the Act.
Section 13(1) of the Insurance Act provides that every
insurer carrying 0n life insurance business shall. in
respect of the life insurance business transacted in India.
cause once at least in every three years an investigation to
be made by an actuary into the financial condition of the
life insurance business carried on by him, including the
valuation of his liabilities in respect thereto. An abstract
of the report of the actuary is to be made in accordance
with the regulations contained in Part I of the Fourth
Schedule and in conformity with the requirements of Part II
of that Schedule. Section 13(2) provides that the provisions
of sub-s. (1) regarding the making of an abstract shall
apply whenever at any other time an investigation into the
financial condition of the insurer is made with a view to
the distribution of profits or an investigation is made of
which the results are made public. The abstract is to be
certified on behalf of the insurer to the effect that full
and effective particulars of every policy under which there
is a liability either actual or contingent have been
furnished to the actuary for the purpose of investigation.
Section 15 requires the submission of the aforesaid
abstract to the Controller within the specified period. Part
II of the Fourth Schedule requires that every extract
prepared in accordance with the requirements of that part of
the Schedule will have the statement of a consolidated
revenue account in Form G, a summary and valuation in
Form H. a valuation balance sheet in Form I and a statement
in Form DDD as set forth in Part H of/he Third Schedule
annexed to it. The valuation balance sheet in Form I
requires the noting of a surplus, if any, of the balance of
the life insurance fund as compared to the net liability in
the business as shown in the summary and valuation of
policies. It is the surplus no, led in this
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Form 1 which is really the valuation surplus. It was out of
such surplus that the company resolved that the advances of
Rs. 1,10,000/and Rs. 32,000/- could be paid to the General
Department by the Life Department. No such actuarial
valuation was made by the actuary prior to the transfer of
Rs. 82,000/- to the General Fund by the resolution dated
January 6, 1956.
Reliance in this connection is placed on behalf of the
appellants on the letter of the actuary dated July 25, 1955.
The actuary states:
“On the above basis, the valuation shows
a policy liability of Rs. 20,20,421. The
Life Insurance Fund is Rs. 21,32,455. Thus
there is a surplus of Rs. 1.12.033. The
surplus includes Rs. 53,300 being the amount
of appreciation on investments taken into
account by you in the past two years.
Thus the net working surplus is Rs. 58,733/-.
The cost of Bonus at the rate of Rs.
10/- per thousand is approximately Rs.
48,000/-.
Thus the surplus is sufficient to enable
a bonus declaration at the above rate even
after excluding the appreciation amount or
setting it apart as an additional reserve for
future use.
Conclusion: The result is satisfactory.
Continuing the same method of working as you
have followed. the statutory valuation as on
31-12-55 will surely enable you to declare a
higher bonus.”
Firstly, it does net 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 lfie
Department but this does not mean that the Life Department
was bound to pay back the amount the moment it had any
valuation surplus.
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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.
In the circumstances, we cannot resist the conclusion
that the Directors passed a resolution for the transfer of
this amount 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.
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 couId not
definitely decide as to how any further amount upto Rs.
60,000/- could be taken back to the GeneraI 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.
We are therefore of opinion that the Tribunal took a
correct view about the nature of the transfer of Rs.
1,10,000/- in 1948 and Rs. 32,000/- in 1952 to the Life
Insurance Fund and rightly held that the transfer of Rs.
82,000/- to the General Department by’ resolution dated
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 to the General Department.
The appeals therefore fail and are dismissed with costs,
one hearing fee.
Appeals dismissed.
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