SHYAMAPADA CHAKRABERTTY AND OTHERS versus THE OONTROLLER OF INSURANCE, GOVERNMENT OF INDIA SIMLA AND OTHERS

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.

p. 131

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 introduced by him. They complain that their respective rights ha'lll been adversely a.nd illegally affected by the ea.nction.

pp. 131–132

Tho transferor company is tho India Equitable Insurance Company Ltd. and the transferee company, the Area Insure.nee Compa.n~· Ltd. Under the transfer a.II the life insurance busi including liabilities issued and all the life fund of the transferor company were ta.ken over by tho transferee company. It is said-and perhaps that is the correct position-that a.s a. result of the tra.nfer all the transferor company would vest in the transferee company and·the tra.nsferor company would really become defunct.

p. 132

The first point argued by Mr. Sinha. for tho a.ppellan1 s is th .. t the transfer offends 10 a.nd 12 of tho Companies Act. The Companies Act with which we arc t'oncerned, is the Companie& Act of 1913 it stood in 1954. Section 10 of the Companies Act provides tha.t a. colilpany shall not alter the conditions contained in its memorandum except a.s provirled in that, Act. Section 12 states tba.t a. company ma.y by special resolution alter the pro. visions of its memorandum with respect to its object.ii but that the a.Iteration sha.11 not take effect until it is confirmed by court on petition. The contention of the learned Advocate is that the arrangement of trqnsfer really amount& to abandonment of the business of the tra.risferor company a.nd therefore to an a.Iteration of its memorandum without following the procedure la.id down in s. l:! and this'cannot be done. The obvious answer to this contention is tha.t the transfer does not effect any a.ltrea.tion in the memorandum of the transferor company. Clause 3(27) of the memorandum of the transferor company gives it the power to &ell its undertaking. The transfer in this oa&e is a.n exercis~ of this power a.nd hence within the object. of the company. An exercise by a. company of a. power given by its memorandum cannot amount to an alteration of the memorandum at all.

pp. 132–133

It is then said that 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, therefor.c, 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.

p. 133

Mr. Sinha then contends that the result of the transfer waR 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(') 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 Act, makes certain specific provisions which, as we shall pre;ently show, ovaridP, the provisions of the Companit:s Act. The objection baBe<l on Bisgoal"s case(') is ill founded. Thero a company was sought virtually to be wound up and its aseets distributt>d in purported exercise of a power to the undertaking and other coglla te powers contain eel in its memorandum of association, aud this the Court said could not be done as it would make the provisions for winding up in the Companies Act indfective In ihe 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 (' ). Further there is not here, as there was in Bisgood's cuse ( a distribution of th(l assets of the tran.~feror com pan} after its undertaking had been transferrecl. Hence we have here no winding up really.

pp. 133–134

·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. lo tramfer the undertaking of the company. That section gave the direct.ors power to transfer the undcrt&kiug with the cof1sent of the company in gcncrnl meeting. In the present case, what had happened wa.a that an agreement between the t.wo companies for the purpose of the transfer had been ma.de by the directors and it was subsequently approved Ly the shareholders of the transferor company at a genera.I meeting by about 82 per cent, majority. It was after suoh approval tba.t the transfer had been sanctioned under s. 36 of the Insura.noe Act, and may be, though we do not have this on the record, the transfer was effected oby proper documents executed between the companies. An agreement only to transfer the undertaking by the directors clearly does not violate a. 86H for it ill merely tentati,·e subject to final approval by tile Company in general meeting. This we think is by itself sufficient answer to Mr. Sinha's persent contention.

pp. 134–135

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 di1 ectors had no power to transfer in view of s. SfiH, 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 arrreement 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. 86 H of which the ohareholders cannot be heard to deny knowledge. The case of Permila.Devi v. Peoples B<tnk of Northern India Ltd.(1) on . which Mr. Sinha relied for the 'persent purpose is of no assistance to him. There certain shares had been illcgaly forfeited but it was contended that the 'shareholders had ratified the forfetiture. It was held that the ratification, if any, was of no use because it had not been shown that the attention'of thi> shareholdern 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.

p. 135

!Vlr. 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 sr>ys that a reduction of share capital mm be effected only as provided in s. 55 and the succeeding sections of the Companies Act. This contention ·is, in our view, wholly misconceived. R~duct.ion 0f share capital under these sections, is not brought about by loss of assets. A bare perusal of the sections, we think, is enougll to C6tablish that. The disappearance of the assets of tho Company, , for wharever reason, dOt's not cause a reduction of the share capital.

pp. 135–136

Another point raised by Mr. Sinha is that the transfer was bad as it offended s. 44 of the Inaurance Act. Under thi.t section certain insurance a.gents have been given certain rights against their employer companies to receive oommisaion in respect of renewal premiums paid. We will assume for the present purpose that the petitioner who is an agent, had acquirccl such a right against the transferor company uncler s.44. We do not however see that such rights a.re in any way affected by tho transfer, The right. of the pctitiunn agent again~t the Company remains. It may be that he cannot rea lisc the amount duP, by enforcing that right because th\) tramferor company has no assets left after the transfer out of whic-h to pay the commission. But 44 clors not say that an insu-. ranee company shall not be entitled lawfully to de.al with its assets where the effect c1f such dealing might be that nothing is left out of which the agents oan be paid their commission. Further, more it hRs 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 transfer shall not be sanctioned if the effect of it is to leav'l no aaeets with the transferor company. Reading the two sections together, as we must do, it is not possible t.o take t.he view that transfer cannot be sanctioned undtir s. 36 if the result of that iR to denude the transfer or company of all its assets out of which an agent can be paid his commission.

p. 136

A further point is based on Art. 14 of the Constitution. It is said that there were other iusuran~ti comp.1nies in tho same insolvent poaition as the transferor company and that the policy-holders of th~ latter company alone were being made to suffer. It may be stated here that the transfer involved a condition affecting slightly adv~rsely 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 d the transferor company were heard. Again, s. 36 of the Insurance Act applies to all insurance companies where the companie& in general me\'ting agree to a transfer. No action under s. 36 can ho taken except on the initiative of the companies concerned. It is done in the best interests of the policy-holders.

pp. 136–137

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.

p. 137

S. 35. (I) No life insurance business of an insurer specified in sub-clause (a)(ii) or sub· J!ause (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.

p. 137

(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 as may be necessary for giving effect to the scheme.

p. 137

(3) Before an application is made to the Controller to sanction any auoh scheme, notice of the intention to make the application together with a statement of the nature of 13S SUPR:i:~·ll; cotrRT REPOHTR rl962j SO.PP.

pp. 137–138

the amalgamation or transfer, aa the case may be, and of the reason i.herefor shall, at least two months before the application is made. be sent to the Controller and certified copies, four il. 11Umber, of each of the following documentfi shall be furnished to the Controller, «11d other such copies shall during the two months aforesaid be kept open for the inspection of the membere and policy-holders a.t the principal and branch offices and chief agencies of the insurers

p. 138

concerned, namely. [Herc cerc.a.in ducuments are specified. J

p. 138

S.36. (I) When any application such as is referred to in sub-eection (:!) of section 35 is ma.de to the Controller, the controller shall ;f for special reasons he so direr-ti!, notice ca.use, of the applica.tion to be sent to every person resident in India who is the holder of a policy of any insurer concerned and shall cauee a. statement of tho nature and terms of the nma.lga.mation or transfer, as the case may bo, to be publishea in such manner and for such period as he may direct and after, hearing the directors and sucli policy-holders apply to be beard and other whom he considers entitled to be heard, may sancUon the arrangement, if he is satietied that no sufficient objection to the a.rrapgement has been established and shall make such consequential orders are necessary to give effect to the arrangement, including orders to the disposal of any deposit ma.do under section 7 ur section 98 :

p. 138

It would appear from the termes ofH.35 (:!) that it contemplates the following steps :

p. 138

(a) A notice of tho intention to make an application to the Controller of_ Insura.n~e for sane· tion of the transfer ha11 to be given to him.

p. 138

(b) Thereafter, together with the notice, certain specified documents have to be kept open for the inspection of the shareholders for .two months.

p. 139

( c) After the expiry of the period ot two months, an application has to be made to the controller of insurance for sanction of the transfer.

p. 139

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. )3efore the upplication to the Controller was made, the directors of the companies wero 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 op.en for the inspection of the.- shareholders. On October 30, J9,)J, an application to sanction the transfer was made under s. 35 (3) of Insurance Act Subseque11tly, also further modifications were suggested by the Controller. On July 28, 19.52, the transferor company in its gen.era! meeting considered the suggestions of the Controller and approved of the scheme with certain modifications, to the details ef which it is not necessary to refer. The scheme so modified contained the following clause.:

p. 139

Cl. 16. That this arrangement is conditional upon the sanction on a subsequent date either with or without any mcdification of the terms hereof impos'ed or approved by the Controller and accepted by the parties here to and subject as afores!l.id, the provisions a.s mentioned herein shall be operative on and from the thirty-first of December I 950.

p. 139

It was this scheme which was approved by the Company in its general meeting by the following resolution: "Read, eon~idered and thoroughly disous· eed the proposed scheme of transfer: .... and resolved that t.hc proposed transfer ...... having been found to be arranged by the directors of the Company in the best inte1ests of the Policy.holders, the same be and arc hereby approved and confirmed, and resolved fmther that the directors be and are hereby authorised to make and accept further modifications and alterntions in the scheme it a11y suggested by the Controller of Insurance." lt appears that certain further mndifications in the scheme were thneafter made. The Controller directid notire to be issued to all polioy-holders giving them full infor. mation of the scheme and fixed a date for hearing. All policy-holdera desiring to be heard, were heard. Before however the Controller passed his order sanctioning the scheme, the petition, c,ut of which this appeal arises was filed on February 13, 1954. Apparently, on this date further hearing of th~matter by the Controller was pending. On iliarch 8, H'54, the controller gave his sanction to the scheme as modified. Thflroafter, the petitioners on May 14, 1954, filed a supplementary petition asking for a writ quashing the order, tho first petition having only for asked a writ to quash the proceeding then pending before the Controller.

pp. 139–140

Mr. Sinha points out-and in this he is right-that after notice under s. !.l5 (3) had been iSBued, the scheme of transfer had been modifioo blltl it was such modified scheme that was sanctiom•d by tho Controller. Mr. Sinha.'s point is that under

p. 140

36 the Controller could only ~unction the scheme of which notice bad 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 raiaed. 2 s.c:R.

pp. 140–141

We will resume for the present purpose that unJer s. 36 (I) only the scheme of tran~Lir in respoct of which notice under s. 35 (3) had been given could be ~auctioned and not a modifiei.f version of it. The scheme and the resolution of the shareholders of the transferor eJmpany apprnving it, however both provideJ for its modification later at the suggestion of the C:mtroller an::l gave power to tho directors to accJpt 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 oi which notice had been given under s. :~5 (3) which was sanctioned.

p. 141

A similar view was taken in England in regard to ss. 153 and 154, of the English Companies Act, 1929. Those sections dealt with compromis~s witli 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 shere-holders or reject it bub had no power to modify it. The contention of Mr. Sinha in the present case it will be remembered, is substantially tbe same. To remove the doubt as to the power to modify the scheme after it had been app~oved by the shareholders of the com p:Lnies concerned, the author of of Palmer's Company Precedents appears to have recommended the devic~ of inserting in the scheme a clatise giving power to the court to modify the scheme and the directors to accept the modification. In the 16th Edition of this well known bJok the following passage appears at p. 844,

p. 141, margin A

"It is more than doubtful whether, if a particular scheme is agreed to at a general meeting of creditors, the court can sanction that scheme with modifications, unleee there ie some provision in the scheme pro.viding for possible modifications. In cases whether has no such pwvi$ion, and some modification has hE>en t bought cxpedirnt, the court has rt•quire.-l the calling of a second meeting to consider the sc·hemc aR modified ; but to avoid this inconvenience it has for some time past been usual to insert in hemes a clause (originated hy the author) expressly rmpowrring the liquidator to ass<'nt to any mc<lifiratiuns or conditions appron•d or impo8i'd by the court, and thie provi~io11 was approved b~· Chitty J. in Dominion of Canada, etc. Co .. 55 L.T.

pp. 141–142, margin A

341 nnd hns frN1uent.Jy heen acted on. This practice acems to have obtained approval in our country to : sec lllihirendmki.ihore Datta v. Brahmanbaria Loan Company Ltd., (') turning on s.153 of thP. Companies Act, 1913, which corr~spon­ dcd to the sections of the English Act earlier ml'ntioned,

p. 142

Mr. Sinha contends that the authorities on the Compani('B Act Parlier referred to had no aprlication to the pn-s•·nt cas•·. HH says that the sections of the Companic·s Act8 on which these authorities turned were not 1ia.ri mc•leria with ss. :i5 and 3u of the ln8urance Ad. HiH tontcntion is that the object of these sections of tho InHumn"e Act wa~ to pr<•tect the shan•holders and policy holders of the Company and that tht·y wonl<l ho drprind of that protection if a HC-h<·me modified SllbHcquentJy thH of th<' not ice :~;; (:l) con Id L" sanctioned. Wo do not think that this contentinn well fot1n<le<l. So fur as till' policy-holders are concerned, they have nothine' to do with the appr11val of the ttchemc. The seh<·me of tranHfer was agreed to betw<·c·n tlw 8hart·l10l<ll'rS of till' companies conccrn~d in th<' 1h·al. A,sume, aH .!\fr. ~inha says, that under the InsumilCC Act, a~ it is under the 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 modifiy 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 es. 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.

pp. 142–143

The result is that this appeal must. be dismissed wit.h costs and we order accordingly. '.I.here will be one set of hearing costs.

p. 143

Appeal Dismissed

p. 143