1. Transfer of funds from life insurance fund to general department of a composite insurer — recovery application under Section 15, Life Insurance Corporation Act. (Para 1 , 2 , 9 , 11 )
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1965 Supreme(SC) 120
SUPREME COURT OF INDIA
P.B. GAJENDRAGADKAR, C.J.I., M. HIDAYATULLAH, RAGHUBAR DAYAL AND V. RAMASWAMI, JJ.
1. Damji Valji Shah and another (In C. A. No. 676 of 1962), 2. Ghanshyamdas (In C. A. No. 677 of 1962), Appellants
Versus
Life Insurance Corporation of India and others (In both the Appeals), Respondents.
Civil Appeals Nos. 676 and 677 of 1962.
Advocates appeared
M/s. O. P. Malhotra and Hemendra K. Shah, Advocates, and M/s. J. B. Dadachanji, O. C. Mathur and Ravinder Narain, Advocates of M/s. J. R. Dadachanji and Co., for Appellants.
In C. A. No. 677 of 1962
Mr. H. M. Thakur, Advocate and M/s. S. N. Andley, Rameshwar Nath and P. L. Vohra, Advocates of M/s. Rajinder Narain and Co., for Appellant.
Mr. C. K. Daphtary, Attorney General for India, (M/s. D. P. Mehta and K. L. Hathi, Advocates, with him), for Respondent No. 1 (In both the Appeals).
Advocates:
C.K.DAFTARY, D.P.MEHTA, H.K.SHAH, H.M.THAKOR, J.B.DADACHAN, K.L.Hathi, O.C.MATHUR, O.P.MALHOTRA, P.L.VOHRA, RAMESHWAR NATH ROY, Ravindra Narayan, S.N.ANDLEY
C.K.DAFTARY, D.P.MEHTA, H.K.SHAH, H.M.THAKOR, J.B.DADACHAN, K.L.Hathi, O.C.MATHUR, O.P.MALHOTRA, P.L.VOHRA, RAMESHWAR NATH ROY, Ravindra Narayan, S.N.ANDLEY
Special legislation granting exclusive jurisdiction to a Tribunal overrides general company law restrictions during winding up. Furthermore, transfers to a life insurance fund are deposits for policyholder security, not loans, and are only repayable upon a certified valuation surplus.
Headnote:(A) Life Insurance Corporation Act, 1956 - Sections 15, 41, 44; Insurance Act, 1938 - Sections 7, 8, 10, 13, 15; Companies Act, 1956 - Section 446 - Transfer of funds from life insurance fund to general department - Jurisdiction of Tribunal during winding up - Nature of transfers to life fund.
(B) Jurisdiction - Where a special act grants exclusive jurisdiction to a Tribunal, the restrictions on commencing or proceeding with legal actions against a company under winding up as per the general companies law do not operate to curtail such jurisdiction. (Paras 17-19)
(C) Applicability of Special Act - An exemption provided for insurers whose business is being wound up under court orders applies only if such winding up was in progress when the act came into force or on the appointed day. Subsequent winding up does not exempt the entity from the act's provisions. (Paras 20-21)
(D) Life Insurance Fund - Amounts transferred to a life insurance fund to meet net liabilities are deposits to augment the fund and not loans. Such funds are the security of policyholders and cannot be transferred back to a general department unless there is a technical valuation surplus as defined under the law. (Paras 23-26)
Facts of the case:
A composite insurer transferred funds from its general department to its life insurance fund to avoid a deficiency in the fund. Later, a portion of these funds was transferred back to the general department. Following the nationalization of the life insurance business, the statutory corporation sought recovery of this sum, alleging the transfer was without consideration and lacked prudence. The company was subsequently ordered to be wound up by the High Court.
Findings of Court:
The transfers to the life fund were not loans but deposits to augment the fund. The subsequent transfer back to the general department was not based on a valuation surplus and was contrary to the Insurance Act. The Tribunal maintained jurisdiction despite the winding-up order.
Issues: Whether the Tribunal had jurisdiction to proceed after a winding-up order was passed; whether the special act applied to the company; and whether the transfer of funds from the life fund to the general department was for consideration.
Ratio Decidendi: Special legislation overrides general law; therefore, the exclusive jurisdiction of the Tribunal under the special act is not curtailed by the general companies law. The statutory exemption for companies in liquidation applies only to those being wound up at the time of the act's commencement. Transfers to a life insurance fund are deposits for policyholders' security and cannot be treated as loans repayable without a certified valuation surplus.
Result: Appeals dismissed.
Legal Category Hierarchy
- insurance law
- practice and procedure
- administrative law
Table of Contents
2. Tribunal jurisdiction during winding up under Companies Act — applicability of Section 44, LIC Act — nature of fund transfers as loan repayments for consideration. (Para 12 , 14 )
3. Exclusive jurisdiction of Tribunal under Section 41, LIC Act — nature of Life Insurance Fund deposits — lack of proper actuarial valuation surplus for transfers. (Para 17 , 18 , 23 , 24 , 29 , 30 )
4. Special Act overrides general law on jurisdiction — Section 44, LIC Act exclusion applies only to insurers being wound up at the Act's commencement. (Para 19 , 20 , 21 )
5. Appeals dismissed and decree of the Life Insurance Tribunal upheld. (Para 34 )
6. Does a winding-up order under the Companies Act bar proceedings before the Life Insurance Tribunal?
No. Section 41 of the LIC Act grants the Tribunal exclusive jurisdiction. As a special Act, the LIC Act overrides the general provisions of the Companies Act regarding the commencement of proceedings against a company. (Para 17 , 18 , 19 )
7. Does Section 44 of the LIC Act exempt a company from the Act if it is ordered to be wound up after the Act's commencement?
No. The exemption under Section 44 applies only to insurers whose business was being wound up under court orders at the time the Act came into force or on the appointed day. (Para 20 , 21 )
8. Are transfers from a general department to a life insurance fund to meet statutory liabilities considered loans?
No. Such transfers are deposits made to augment the life fund to ensure it exceeds net liabilities. They are not loans and cannot be repaid unless there is a proper actuarial valuation surplus. (Para 23 , 24 , 25 )
9. What constitutes a valuation surplus for the purpose of transferring funds from a life insurance fund?
A valuation surplus is a technical term determined through an actuarial investigation and recorded in the valuation balance sheet (Form I) as the excess of the life insurance fund over net liabilities. (Para 27 , 28 , 29 )
Judgment
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 C. A. 676 of 1962, Ghanshyamdas, appellant in C. A. 677 of 1962, the afore-mentioned 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 thereon at 6 per cent 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.
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 of the 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
