Case Law Companies Act Shyamapada Chakraberity Vs The Controller of Insurance

PETITIONER:
SHYAMAPADA CHAKRABERTTY AND OTHERS

Vs.

RESPONDENT:
THE CONTROLLER OF INSURANCE, GOVERNMENT OF INDIA SIMLA AND OT

DATE OF JUDGMENT:
13/12/1961

BENCH:
SARKAR, A.K.
BENCH:
SARKAR, A.K.
GAJENDRAGADKAR, P.B.
WANCHOO, K.N.
GUPTA, K.C. DAS
AYYANGAR, N. RAJAGOPALA

CITATION:
1962 AIR 1355 1962 SCR Supl. (2) 130
ACT:
Insurance-Business-Transfer by one company to
another, when permissible-Insurance Act, 1938 (4
of 1938), ss. 35(3), 36 (1)-Indian Companies Act,
1913 (7 of 1913), ss. 10, 12, 186H.

 

HEADNOTE:
In an application under Art. 226 of the
Constitution, to challenge the validity of the
transfer of a life insurance company’s business to
another company under s. 36 of the Insurance Act,
1938:-
^
Held, the transfer though it brought about an
abandonment of the business of the company was not
bad as resulting in an alteration of the
memorandum of the company without recourse to s.
12 of the Indian Companies Act, 1913. The
Company’s memorandum of association contained a
power to sell its undertaking and an exercise of
that power does not amount to alteration of the
memorandum. The transfer was not a winding up of
the company without following the procedure laid
down in the Companies Act and hence invalid. It
was effected under the provisions of the Insurance
Act.
Bisgood v. Hendersons Transval Estate, [1908]
1 Ch. 734, distinguished.
An agreement by the directors of a company to
transfer its undertaking subject to confirmation
by the company in general meeting did not offend
s. 86H of the Companies Act. Section 55 and the
connected sections of the Companies Act do not
contemplate reduction of share capital brought
about by loss of assets and loss of assets does
not amount to reduction of share capital.
Section 44 of the Insurance Act does not
prevent an insurance company from dealing with its
assets though as a result thereof no asset was
left out of which the agents of the company might
be paid commission to which they are entitled
under the Insurance Act.
131
Section 36 of the Insurance Act does not
offend Art. 14 of the Constitution. That section
applies to all insurance companies which in
general meeting agree to a transfer.
Even if it is assumed that under s. 36 (1) of
the Insurance Act only that scheme of transfer of
which notice under s. 35 (3) of the Act had been
given could be sanctioned and not a modified
version of it, there would be power to sanction a
modified version where the scheme itself or the
resolution of the company approving of it, gave
power to the directors to accept modifications of
that scheme on behalf of the company suggested by
the controller of Insurance before final sanction
by him.
Mihirendrakishore Datta v. Brahmanbaria Loan
Co.,(1934) I.L.R. 61 Cal. 913, referred to.

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 300 of 58.
A. N. Sinha, N. H. Hingorani and P. K.
Mukherjee, for the appellants.
C. K. Daphtary, Solicitor-General of India,
R. Ganpathy Iyer and R. H. Dhebar, for respondent
No. 1.
C. K. Daphtary, Solicitor-General of India
and K. L. Hathi, for respondent No. 3.
1961 December 13. The Judgment of the Court
was delivered by
SARKAR, J.-This appeal raises certain
questions as to the validity of an order made
under s. 36 of the Insurance Act, 1938,
sanctioning the transfer of its life insurance
business by one insurance company to another. The
appellants had challenged that order by a petition
field under Art. 226 of the Constitution in the
High Court of Punjab. The High Court having
dismissed the petition they have come to this
Court in appeal.
There are three appellants, one of whom is a
shareholder of the transferor company, another a
policy-holder in it and the third, one of its
agents who claims to have become entitled under
the Insurance Act to receive from it commission on
renewal premiums paid on life insurance business
132
introduced by him. They complain that their
respective rights have been adversely and
illegally affected by the sanction.
The transferor company is the India Equitable
Insurance Company Ltd. and the transferee company,
the Area Insurance Company Ltd. Under the transfer
all the life insurance business including
liabilities issued and all the life fund of the
transferor company were taken over by the
transferee company. It is said-and perhaps that is
the correct position-that as a result of the
transfer all the transferor company would vest in
the transferee company and the transferor company
would really become defunct.
The first point argued by Mr. Sinha for the
appellants is that the transfer offends ss. 10 and
12 of the Companies Act. The Companies Act with
which we are concerned, is the Companies Act of
1913 as it stood in 1954. Section 10 of the
Companies Act provides that a company shall not
alter the conditions contained in its memorandum
except as provided in that Act. Section 12 states
that a company may by special resolution alter the
provisions of its memorandum with respect to its
objects but that the alteration shall not take
effect until it is confirmed by court on petition.
The contention of the learned Advocate is that the
arrangement of transfer really amounts to
abandonment of the business of the transferor
company and therefore to an alteration of its
memorandum without following the procedure laid
down in s. 12 and this cannot be done. The obvious
answer to this contention is that the transfer
does not effect any alteration in the memorandum
of the transferor company. Clause 3(27) of the
memorandum of the transferor company gives it the
power to sell its undertaking. The transfer in
this case is an exercise of this power and hence
within the objects of the company. An exercise by
a company of a
133
power given by its memorandum cannot amount to an
alteration of the memorandum at all.
It is then said that clause only authorised a
sale and that a sale is a transfer for a
consideration. It is contended that in the present
case there was no consideration moving from the
transferee company and, therefore, the transfer
was not by way of a sale. This, it is contended,
was, therefore, a transfer without any power in
that regard in the memorandum and hence in
substance amounts to unauthorised alteration of
it. We were referred to various balance-sheets and
other figures in support of this contention. This
point as to want of consideration was not taken in
the petition and the High Court did not permit it
to be raised. We have, therefore, to proceed on
the basis that the transfer was a sale. We wish
however to make it clear that we are not deciding
what is enough consideration for a sale, nor
whether a transfer not authorised by the
memorandum would amount to an alteration of the
memorandum. What we have said furnishes enough
answer to the contention raised.
Mr. Sinha then contends that the result of
the transfer was a virtual winding up and that it
was not one of the corporate objects of a company
to wind it up. The contention was that the winding
up could be effected only under the provisions of
the Companies Act. We were referred to Bisgood v.
Henderson’s Transvaal Estates Ltd(1) as authority
for this proposition. We think, this contention is
misconceived. What was done in this case was done
under the provisions of the Insurance Act and not
by way of carrying out a corporate object of the
transferor company. Now, s. 117 of the Insurance
Act provides that nothing in that Act would affect
the liability of an insurance company to comply
with the provisions of the Indian Companies Act,
in matters not otherwise specifically provided for
by it. Section 36, of the Insurance Act, which has
for the present purpose to be read with s. 35 of
that
134
Act, makes certain specific provisions which, as
we shall presently show, override the provisions
of the Companies Act. The objection based on
Bisgood’s case(1) is ill founded. There a company
was sought virtually to be wound up and its assets
distributed in purported exercise of a power to
sell the undertaking and other cognate powers
contained in its memorandum of association, and
this the Court said could not be done as it would
make the provisions for winding up in the
Companies Act ineffective. In the present case the
thing has been done under express statutory power.
No question here arises of a corporate power in
the sense it arose in Bisgood’s case (1). Further
there is not here, as there was in Bisgood’s case
(1), a distribution of the assets of the
transferor company after its undertaking had been
transferred. Hence we have here no winding up
really.
The next contention of Mr. Sinha is that the
arrangement for the transfer had been made by the
directors and the directors had no power in view
of s. 86H of the Companies Act, to transfer the
undertaking of the company. That section gave the
directors power to transfer the undertaking with
the consent of the company in a general meeting.
In the present case, what had happened was that
an agreement between the two companies for the
purpose of the transfer had been made by the
directors and it was subsequently approved by the
shareholders of the transferor company at a
general meeting by about 82 per cent, majority. It
was after such approval that the transfer had been
sanctioned under s. 36 of the Insurance Act, and
may be, though we do not have this on the record,
the transfer was effected by proper documents
executed between the companies. An agreement only
to transfer the undertaking by the directors
clearly does not violate s. 86H for it is merely
135
tentative subject to final approval by the Company
in general meeting. This we think is by itself
sufficient answer to Mr. Sinha’s present
contention.
Mr. Sinha however says that the approval by
the Company at its general meeting was of no use
because the defect in the original agreement,
namely, that the directors had no power to
transfer in view of s. 86H, was not pointed out at
that meeting to the shareholders. It is somewhat
difficult to appreciate this point. There was no
defect in the directors’ making the agreement to
transfer; such agreement did not effect the
transfer. Even assuming that the agreement was
beyond the power of the directors, it cannot be
said that the approval of it by the shareholders
had been without any knowledge of the defect. The
defect was of the want of the directors’ power to
transfer in view of the provisions of s. 86H of
which the shareholders cannot be heard to deny
knowledge. The case of Permila Devi v. Peoples
Bank of Northern India Ltd.(1) on which Mr. Sinha
relied for the present purpose is of no assistance
to him. There certain shares had been illegally
forfeited but it was contended that the
shareholders had ratified the forfeiture. It was
held that the ratification, if any, was of no use
because it had not been shown that the attention
of the shareholders and creditors had been drawn
to the illegality which depended on facts of which
no knowledge by the shareholders could be
presumed. In the present case, the defect, if any,
arose from a statutory provision itself of which
the shareholders must be deemed to have had
knowledge.
Mr. Sinha then says that the transfer was bad
as it involved a reduction of share capital of the
transferor company. His point is that as all the
assets were gone there was necessarily a reduction
of its share capital. He says that a reduction of
share capital can be effected only as provided in
s. 55 and the succeeding sections of the Companies
Act. This contention is, in our view, wholly
136
misconceived. Reduction of share capital under
these sections, is not brought about by loss of
assets. A bare perusal of the sections, we think,
is enough to establish that. The disappearance of
the assets of the Company, for whatever reason,
does not cause a reduction of the share capital.
Another point raised by Mr. Sinha is that the
transfer was bad it offended s. 44 of the
Insurance Act. Under that section certain
insurance agents have been given certain rights
against their employer companies to receive
commission in respect of renewal premiums paid. We
will assume for the present purpose that the
petitioner who is an agent, had acquire such a
right against the transferor company under s. 44.
We do not however see that such rights are in any
way affected by the transfer. The right of the
petitioner agent against the Company remains. It
may be that he cannot realise the amount due, by
enforcing that right because the transferor
company has no assets left after the transfer out
of which to pay the commission. But s. 44 does not
say that an insurance company shall not be
entitled lawfully to deal with its assets where
the effect of such dealing might be that nothing
is left out of which the agents can be paid their
commission. Further, more it has to be remembered
that what has been done in this case has been done
under the same Act. Section 36 of the Insurance
Act does not say that a transfer shall not be
sanctioned if the effect of it is to leave no
assets with the transferor company. Reading the
two sections together, as we must do, it is not
possible to take the view that transfer cannot be
sanctioned under s. 36 if the result of that is to
denude the transfer or company of all its assets
out of which an agent can be paid his commission.
A further point is based on Art. 14 of the
Constitution. It is said that there were other
insurance companies in the same insolvent position
137
as the transferor company and that the policy-
holders of the latter company alone were being
made to suffer. It may be stated here that the
transfer involved a condition affecting slightly
adversely the rights of the policy-holders. It
does not seem to us however that any question of
discrimination arises in the present case. The
transfer was sanctioned with the assent of the
shareholders of the two companies concerned. The
sanction was given after the policy-holders of the
transferor company were heard. Again, s. 36 of the
Insurance Act applies to the insurance companies
where the companies in general meeting agree to a
transfer. No action under s. 36 can be taken
except on the initiative of the companies
concerned. It is done in the best interests of the
policy-holders.
Then it is argued that the terms of ss. 35
and 36 had not been complied with. It is necessary
now to be set out the relevant portions of the
sections and some of the facts of this case.
S. 35. (1) No life insurance business of
an insurer specified in sub-clause (a)(ii) or
sub-clause (b) of clause (9) of section 2
shall be transferred to any person or
transferred to or amalgamated with the life
insurance business of any other insurer
except in accordance with a scheme prepared
under this section and sanctioned by the
Controller.
(2) Any scheme prepared under this
section shall set out the agreement under
which the transfer or amalgamation is
proposed to be effected, and shall contain
such further provisions may be necessary for
giving effect to the scheme.
(3) Before an application is made to the
Controller to sanction any such scheme,
notice of the intention to make the
application together with a statement of the
nature of
138
the amalgamation or transfer, as the case may
be, and of the reason therefor shall, at
least two months before the application is
made, be sent to the Controller and certified
copies, four in number, of each of the
following documents shall be furnished to the
Controller, and other such copies shall
during the two months aforesaid be kept open
for the inspection of the members and policy-
holders at the principal and branch offices
and chief agencies of the insurers concerned,
namely.
[Here certain documents are specified.]
S. 36. (1) When any application such as
is referred to in sub-section (3) of section
35 is made to the Controller, the controller
shall if for special reasons he so directs,
notice cause, of the application to be sent
to every person resident in India who is the
holder of a policy of any insurer concerned
and shall cause statement of the nature and
terms of the amalgamation or transfer, as the
case may be, to be published in such manner
and for such period as he may direct and
after, hearing the directors and such policy-
holders as apply to be heard any other
persons whom he considers entitled to be
heard, may sanction the arrangement, if he is
satisfied that no sufficient objection to the
arrangement has been established and shall
make such consequential orders as are
necessary to give effect to the arrangement,
including orders as to the disposal of any
deposit made under section 7 or section 98:
It would appear from the terms of s. 35 (3)
that it contemplates the following steps:
(a) A notice of the intention to make an
application to the Controller of Insurance for
sanction of the transfer has to be given to him.
139
(b) Thereafter, together with the notice,
certain specified documents have to be kept open
for the inspection of the shareholders for two
months.
(c) After the expiry of the period of two
months, an application has to be made to the
controller of insurance for sanction of the
transfer.
Now, what had happened in this case was that
the notice contemplated by s. 35 (3) was given on
July 27, 1951, and the necessary documents were
kept open for inspection. Before the application
to the Controller was made, the directors of the
companies were in touch with the Controller in
regard to the proposed transfer and the latter
suggested various modifications in the proposed
scheme which was one of the documents which had to
be kept open for the inspection of the
shareholders. On October 30, 1951, an application
to sanction the transfer was made under s. 35 (3)
of Insurance Act Subsequently, also further
modifications were suggested by the Controller. On
July 28, 1952, the transferor company in its
general meeting considered the suggestions of the
Controller and approved of the scheme with certain
modifications, to the details of which it is not
necessary to refer. The scheme so modified
contained the following clause:
CL. 16. That this arrangement is
conditional upon the sanction on a subsequent
date either with or without any modification
of the terms hereof imposed or approved by
the Controller and accepted by the parties
here to and subject as aforesaid, the
provisions as mentioned herein shall be
operative on and from the thirty-first of
December 1950.
It was this scheme which was approved by the
Company in its general meeting by the following
resolution: “Read, considered and thoroughly
discussed the proposed scheme of transfer……
and resolved
140
that the proposed transfer…… having been found
to be arranged by the directors of the Company in
the best interests of the Policy-holders, the same
be and are hereby approved and confirmed, and
resolved further that the directors be and are
hereby authorised to make and accept further
modifications and alterations in the scheme if any
suggested by the Controller of Insurance.” It
appears that certain further modifications in the
scheme were thereafter made. The Controller
directed notice to be issued to all policy-holders
giving them full information of the scheme and
fixed a date for hearing. All policy-holders
desiring to be heard, were heard. Before however
the Controller passed his order sanctioning the
scheme, the petition, out of which this appeal
arises was filed on February 13, 1954. Apparently,
on this date further hearing of the matter by the
Controller was pending. On March 8, 1954, the
controller gave his sanction to the scheme as
modified. Thereafter, the petitioners on May 14,
1954, filed a supplementary petition asking for
writ quashing the order, the first petition having
only for asked a writ to quash the proceeding then
pending before the Controller.
Mr. Sinha points out-and in this he is right-
that after notice under s. 35 (3) had been issued,
the scheme of transfer had been modified and it
was such modified scheme that was sanctioned by
the Controller. Mr. Sinha’s point is that under s.
36 the Controller could only sanction the scheme
of which notice had been given under s. 35. He,
therefore, contends that the sanction granted by
the Controller in this case was not in terms of
the section and hence a nullity. The learned
Solicitor-General appearing to oppose the appeal
contends that on a proper construction of the
sections the Controller had power to sanction a
scheme modified after notice under s. 35 (3) had
been issued. It is however unnecessary in this
case to decide the question so raised.
141
We will resume for the present purpose that
under s. 36 (1) only the scheme of transfer in
respect of which notice under s. 35 (3) had been
given could be sanctioned and not a modified
version of it. The scheme and the resolution of
the shareholders of the transferor company
approving it, however both provided for its
modification later at the suggestion of the
Controller and gave power to the directors to
accept the modifications on behalf of the Company.
The modifications were pursuant to the terms of
the scheme as approved by the share-holders of the
transferor Company. Therefore, in substance, it
was the scheme of which notice had been given
under s. 35 (3) which was sanctioned.
A similar view was taken in England in regard
to ss. 153 and 154 of the English Companies Act,
1929. Those sections dealt with compromises with
creditors and for reconstruction and amalgamation
of companies. These could be effected by an order
of court after the relative scheme had been
approved by the companies or creditors concerned.
It was generally felt that the court could either
sanction the scheme approved by the shareholders
or reject it but had no power to modify it. The
contention of Mr. Sinha in the present case it
will be remembered, is substantially the same. To
remove the doubt as to the power to modify the
scheme after it had been approved by the share-
holders of the companies concerned, the author of
Palmer’s Company Precedents appears to have
recommended the device of inserting in the scheme
a clause giving power to the court to modify the
scheme and the directors to accept the
modification. In the 16th Edition of this well
known book the following passage appears at p.
844,
“It is more than doubtful whether, if a
particular scheme is agreed to at a general
meeting of creditors, the court can sanction
142
that scheme with modifications, unless there
is some provision in the scheme providing for
possible modifications. In cases whether has
no such provision, and some modification has
been thought expedient, the court has
required the calling of a second meeting to
consider the scheme as modified; but to avoid
this inconvenience it has for some time past
been usual to insert in schemes a clause
(originated by the author) expressly
empowering the liquidator to assent to any
modifications or conditions approved or
imposed by the court, and this provision was
approved by Chitty J. in Dominion of Canada,
etc. Co., 55 L.T. 347 and has frequently been
acted on.
This practice seems to have obtained approval in
our country to : see Mihirendrakishore Datta v.
Brahmanbaria Loan Company Ltd., (1) turning on s.
153 of the Companies Act, 1913, which corresponded
to the sections of the English Act earlier
mentioned.
Mr. Sinha contends that the authorities on
the Companies Act earlier referred to had no
application to the present case. He says that the
sections of the Companies Acts on which these
authorities turned were not pari materia with ss.
35 and 36 of the Insurance Act. His contention is
that the object of these sections of the Insurance
Act was to protect the shareholders and policy
holders of the Company and that they would be
deprived of that protection if a scheme modified
subsequently to the issue of the notice under s.
35 (3) could be sanctioned. We do not think that
this contention is well founded. So far as the
policy-holders are concerned, they have nothing to
do with the approval of the scheme. The scheme of
transfer was agreed to between the shareholders of
the companies concerned in the deal. Assume, as
Mr. Sinha says, that under the Insurance Act, as
it is under the
143
the Companies Act, it is the shareholders who must
agree to the scheme. In the cases falling under
the Companies Act, it is for protecting the
shareholders that it has been held that the court
cannot modify the scheme unless the scheme itself
gives the court the power to do so. On the
assumption made we think it perfectly clear that
the position under the Insurance Act is the same.
If Mr. Sinha is wrong and under the Insurance Act
it is not for the shareholders to sanction the
scheme, then there would be less reason for saying
that what could be done under the Companies Act,
cannot be done under the Insurance Act. The
intention of ss. 35 and 36 of the Insurance Act
would on the basis of Mr. Sinha’s contention, be
to protect the shareholders from having to accept
a scheme to which they have not agreed. Such
protection however may be given up by shareholders
by inserting in the scheme approved by them, a
clause empowering the directors to modify it. So
far as the policy-holders are concerned, their
protection is left in the hands of the controller.
That is the policy of the Insurance Act and,
hence, the Controller hears them. In the present
case, he actually heard policy holders. Therefore
it does not seem to us that it can be contended
with substance that ss. 35 and 36 of the Insurance
Act are not pari materia with the sections of the
Companies Act to which we have earlier referred.
The last point of Mr. Sinha must also fail.
The result is that this appeal must be
dismissed with costs and we order accordingly.
There will be one set of hearing costs.
Appeal Dismissed
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