Bombay High Court
Life Insurance Corporation Of India And ... vs Official Liquidator, High Court on 26 July, 1976
JUDGMENT Mridul, J.
1. This judge's summons is directed against an order of the official liquidator dated 1st June, 1976, inter alia, refusing to treat the applicants as secured creditors for a sum of Rs. 3,25,08570. The official liquidator, however, admitted the said claim and held the applicants to be ordinary creditors in respect thereof.
2. The disputes lie in a very narrow compass. The Warden Insurance Co. Ltd. (in liquidation) carried on business, prior to 19th January, 1957, both of life insurance and general insurance. Under Section 10 of the Insurance Act, 1938, the Warden Insurance Co. Ltd. (hereinafter referred to as "the company ") was required to and did maintain separate accounts and funds in respect of its life insurance business and its other general insurance business. It appears that prior to December, 1955, a sum of Rs. 3,23,503-9-3 was transferred from the life insurance fund, of the said company to its general department. Whether this amount was transferred at one stroke or was the aggregate of various amounts transferred from time to time is not clear but as certified by the managing director and the chief accountant of the company in a letter issued to the custodian on 2nd August, 1956, that as on 31st December, 1955, a balance of Rs. 3,23,503-9-3 was shown as due to " controlled life insurance business " of the company.
3. On 19th January, 1956, the Life Insurance (Emergency Provisions) Ordinance, 1956, was promulgated by the President. By virtue of and under the said Ordinance the life insurance business called the "controlled business" was nationalised. The said Ordinance was replaced by the Life Insurance Corporation Act, 1956, on 1st July, 1956. Under Section 7 of the said Act on the appointed day, which was 1st September, 1956, all assets and liabilities of the insurance companies pertaining to the controlled business were transferred to and vested in the LIC, the applicants before me.
4. The applicants submitted the claim to the official liquidator on or before 26th September, 1960. The said claim was supported by an affidavit of Dayaram Jeevan Joshi, the secretary and principal officer of the applicants. In the said affidavit, the applicants claim that they were the secured creditors in the sum of Rs. 3,25,085.70 The argument advanced on behalf of the applicants was that the said amount was an asset of the applicants " on the basis of life insurance business conducted by the company as insurer in the present case prior to the assumption of the control of the life insurance business by the Corporation and, hence, the exclusive title of the Corporation to the amount in question should be upheld.
5. The official liquidator did not dispute the claim of the applicants for the said amount but he raised the question as to whether the applicants could be treated as a secured creditor and answered the said question against the applicants.
6. Sri R.J. Bhatt, the learned counsel for the applicants, submits that under the provisions of Section 10 of the Insurance Act, 1938, the said company was bound to keep the assets pertaining to life insurance business separately. The company was bound under the provisions of Sub-section (2) of Section 10 to form a separate fund called life insurance fund and to carry thereto all assets of the company in respect of its life insurance business. Says the learned counsel that under Sub-section (3) of Section 10, the said life insurance fund was the absolute security of the life policy holders and further that the said company was prohibited by the said subjection from applying directly or indirectly the said fund or a part thereof for any purpose other than relating to its life insurance business. The learned counsel submits that transfer of amounts or the alleged loan given to the general department from out of the life insurance fund was contrary to the prohibitions contained in the said Act and, therefore, the effect was as if no such loan was given or such transfer made and the said amount continued to be a part of the said life insurance fund. On nationalisation of the life insurance business the said amount, as a part of the life insurance fund, came to be vested in the applicants and is the property of the applicants. The grievance of the learned counsel is that the official liquidator misdirected himself as to the legal consequences flowing from the combined reading of Section 10 of the Insurance Act, 1938, and Section 7 of the Life Insurance Corporation Act, 1956. According to the learned counsel, by virtue and under the provisions of the said two sections, the claim of the applicant to the paramount title to the said amount is indefeasible.
7. Shri Munshi, the learned counsel for the official liquidator urges that it is true that under Section 10 of the Insurance Act, 1938, separate accounts had to be kept; and a life insurance fund had to be maintained as distinguished from the other funds or the assets of the insurance company carrying on composite business. The learned counsel submits that the provisions of Section 10 merely contemplate maintenance of separate funds and accounts. The learned counsel admits that under Sub-section (3) of Section 10 it was not permissible for the company to utilise the life insurance fund or any part thereof for any other purpose. The said prohibition, however, according to the learned, counsel, would not invalidate the loan given to the general department or the transfer made to the general department; all that the infraction of Section 10(3) leads to, are the penal consequences provided for in Section 102 of the said Insurance Act, 1938, The counsel has no objection to the claim but his objection is to the said claim being accorded the status of a preferential debt and applicants being treated as secured creditors.
8. In my opinion, the order of the official liquidator is plainly erroneous. Sub Section (1) of Section 10 of the Insurance Act, 1938, ordains that a separate account of all receipts and payments had to be kept by the insurer doing composite insurance business. Sub-section (2) thereof provides in categorical language for carrying over of all assets in respect of life insurance business to a separate fund called the life insurance fund. By the explicit mandate of the said Sub-section all receipts in respect of life insurance business have to be carried over to such a, fund which has to be formed and kept distinct and separate from all other assets of the insurer. To make the mandate of Sub-section (2) and its intendment effective and its evasion difficult Sub-section (3), inter alia, prohibits the insurer from in any manner applying " directly or indirectly for any purposes other than those of the life insurance business of the insurer ", the said fund or any part thereof. Thus upon plain intendment of Sub-section (2) of Section 10 the assets of the insurance company relating to its life insurance business were made a part of the distinct and separate fund constituted for a specific purpose. The life insurance fund, it cannot be disputed, is not only earmarked for a specified purpose mentioned in the said Sub-section (2) of Section 10 but constituted assets pertaining to the life insurance business of an insurance company.
9. Upon the nationalisation of the life insurance business and the vesting of the assets pertaining to the life insurance business in the LIC, the Corporation became under Section 7 of the Life, Insurance Corporation Act, the transferee of all the said funds. The said funds came to be vested in the LIC. Thus, all amounts which constituted the life insurance fund under Section 10 of the Insurance Act, 1938, became vested in the LIC under the provisions of Section 7 of the said LIC Act, 1956. Had there been no transfer of the said amount or if no loan was given out of the said life insurance, fund to the general department of the said company, the amount in question would automatically have vested in the applicants.
10. The narrow question, therefore, that has to be determined is as to whether the transfer of the said amount in Rs. 3,23,503-9-3 constituted a valid transfer so as to take away the said amount from and out of the life insurance fund constituted by the said company. It can not again be disputed that such a transfer was contrary to the statutory embargo placed by Sub-section (3) of Section 10 of the Insurance Act. The said loan or the said transfer being plainly contrary to the imperative prohibitions of Sub-section (3) of Section 10 was invalid. It is true as Shri Munshi contends that an unauthorised transfer from the life insurance fund entails penalties postulated by Section 102 of the said Insurance Act, 1938. But those penal consequences or the provisions made therefor in the said section cannot detract from the invalidity of the said transfer or the said loan. Moreover, two departments of a company or the two funds of a company are mere demarcations for the sake of convenience. The company is the owner of all its funds. It is, therefore, inconceivable that there could be a transaction of a loan between two departments of the said company. Conceptually a loau predicates two parties--creditor who lends and the debtor who receives When amounts are transferred from one fund belonging to a company to another of it it funds there cannot be any creditor or any debtor in respect of such a transfer. The company being one cannot be treated as a dual personality in respect of transfer of its funds from one department to the other or from one fund to the other. Thus, it must be held that there was no loan given out of the life insurance fund to the general department as claimed by Shri Munshi. A fortiori, therefore, it follows that the general department of the company which upon the winding up of the company in the year 1958, came into custody and possession of the official liquidator, cannot be said to be a debtor of the life insurance fund.
11. There being no loan the company cannot be held to be the debtor of the applicants. Furthermore, as already observed, the transfer of the said amount of Rs. 3,23,503-9-3 to the general department being in violation of the provisions of Sub-section (3) of Section 10 of the Insurance Act, 1938, was invalid. The result of such invalidity was as if no transfer took place and as if the said amount of Rs. 3,23,503-9-3 continued to remain an essential part of the said life insurance fund.
12. In Damji Valji Shah v. Life Insurance Corporation of India , a claim was made against the directors of an insurance company in respect of certain amounts which were transferred from its life insurance fund to its general department. The claim of the directors before the Supreme Court was that they were not liable to the life insurance fund in the facts and circumstances of the said case. The relevant facts were that on an earlier occasion funds were transferred from the general department of the said company to the life insurance fund. However, just prior to promulgation of the Ordinance (Life Insurance Emergency Provisions Ordinance, 1956), the company transferred some of the amounts from the life insurance fund to the life insurance department. The argument was that such a transfer was made in order to pay up the loan which was earlier advanced by the general department to the life insurance fund. The Supreme Court negatived the contention upon the ground that no such loan transaction was possible between the two departments of the same company. The Supreme Court observed ;
"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. "
13. The Supreme Court negatived the plea based on the transfer, by holding as follows :
" 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 up to 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. "
14. Shri Munshi submits that the ratio of the decision of the Supreme Court in the abovementioned case is distinguishable on the facts of the present case. The learned counsel says that that was a case which arose in respect of a claim made by the LIC against the delinquent directors for a wrongful transfer ; it was not a case where the Supreme Court was called upon to give effect to the provisions of Section 10(3) of the Insurance Act, 1938, or the effect of the violations of Sub-section (3) thereof. I am not impressed by Shri Munshi's argument. It is undoubtedly true that the Supreme Court came to decide the said matter on an appeal from the order of the Tribunal constituted under the LIC Act, 1956. It is also true that the claim made therein and upheld by the Tribunal was against the directors of the insurance company. The factual frame-work of the said case, however, still required consideration of two analogous issues, viz., (1) as to what is the effect of the transfer made in breach of Sub-section (3) of Section 10 of the Insurance Act, 1938, and (ii) as to whether there could be a transaction of loan between the two departments of the same insurance company. The Supreme Court decided the said issues upon the legal principles referred to above. These legal principles, viz. that there cannot be a transaction of loan between the two departments of the same insurance company and that a transfer in violation of any provisions of Section 10(3) constitutes a transfer with its concomitants as if the amounts transferred continued to remain in the life insurance fund are also the legal parameters of the present case. In my opinion, the present case falls squarely within the rules enunciated by the Supreme Court in the abovementioned Damji's case [1965] 35 Comp Cas : 755. Accordingly, it must be held that the amount of Rs. 3,23,503-9-3 continued to remain in the life insurance fund which came to be vested in the applicants. The applicants, therefore, as the absolute owners of that amount were entitled to receive it back from the official liquidator. It is argued by Shri Munshi that there is no dispute that the amount is payable to the applicants. His grievance is that, in respect of this amount the applicants cannot be treated as a secured creditor and since they are not to be treated as a secured creditor, they must rank as an ordinary creditor in winding-up. There is substance in Shri Munshi's contention that the applicants cannot be called a secured creditor. This is so because there being no loan the life insurance fund was not the creditor and the general department a debtor. Also the security contemplated in respect of life insurance fund is in favour of the policy-holders. This follows from the plain language of Sub-section (3) of Section 10 which, inter alia, reads ;
" The life insurance fund shall be as absolutely the security of the life policy-holders... "
15. The question before me is not whether the applicants are secured creditors. In my opinion, any discussion in respect thereof would be irrelevant and unnecessary. The question is whether the applicants, as the absolute owners of the said amount, which is a part of life insurance fund, are entitled to receive such amount as a person who stands outside the winding-up. This question, in my opinion, must be answered against the official liquidator.
16. It is established law that a secured creditor stands outside the winding-up. The reason of this rule is that a secured creditor has property in the security. A mortgagee, it is well-known, has an interest in the property mortgaged to him. A hypothecatee of book debts has an interest in the said book debts which are merely in the nature of a chose-in-action. When a secured creditor is held to be a person who stands outside the winding-up by reason of the fact that he has some interest in the property secured to him, in principle I do not see any reason why an absolute owner also should not be considered to be a person who stands outside the winding-up.
17. In Food Controller v. Cork [1923] AC 647 (HL), Lord Wrenbury had an occasion to prove the rationale for the principle as to why the secured creditors are held to be outside the winding-up. At page 670, the learned judge observed as follows :
" The mortgagee of a company in liquidation is in a position to say the mortgaged property is to the extent of the mortgage my property. It is immaterial to me whether my mortgagor is in winding-up or not. I remain outside the " winding-up " and shall enforce my rights as mortgagee'."
18. This passage was cited with approval by the Supreme Court in M.K. Ranganathan v. Govt. of Madras .
19. The reason of the rule being the element of property howsoever qualified or limited it may be in case of a mortgage, it must follow that an absolute owner cannot be put in a more disadvantageous position as compared to the qualified or limited owner. If a mortgagee is held to be outside the winding-up, by the same token it must be held that an absolute owner also stands outside the winding-up. In view thereof the conclusion is irresistible that the applicants as persons in whom the amounts stood vested were entitled to receive the said amount from the official liquidator in their own right as persons who do not come within the purview of the winding-up proceedings.
20. Even on the assumption that there was a transaction of loan or that the applicants were merely the creditors of the company, I take the view that the applicants are entitled to rank as the secured creditors. It is not disputed as indeed it could not be disputed that the amount constituted security in so far as the policy-holders were concerned. This security is created in favour of the policy-holders by a solitary provision of law. The applicants owed fiduciary obligations to the policy-holders in that behalf. The existence of the security in favour of the policy-holders did not, however, take away the status of the applicants as the persons legally entitled to the amounts which constituted the security. In other words, beneficial title to the security was in the policy-holders but the legal title still remained with the applicants. The creation of a security impressed the amount with a fiduciary colour. The benevolent provisions of Section 10(3) of the Insurance Act, 1938, cannot be defeated by the subterfuges of a transfer made by the company. Even otherwise it is open to the charge-holder to follow the security in the hands of third parties except those who are bona fide transferees without notice. This is not the case here. The LIC are seeking to enforce a statutory right of the policy-holders. They have sufficient interest in the enforcement of that right. I, therefore, hold that they have a standing to sue. They have a right to recover the said security. In my opinion, legal semantics cannot defeat the plain intendment of law. They cannot be permitted to defeat the benevolent provisions enshrined in Sub-section (3) of Section 10 of the Insurance Act, 1938. I, therefore, reject the contentions raised on behalf of the official liquidator and set aside his order.
21. In the result, the judge's summons is made absolute in terms of prayers (a) and (b). There shall, however, be no order as to costs.