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PETITIONER: SHYAMAPADA CHAKRABERTTY AND OTHERS

       Vs.

RESPONDENT: THE CONTROLLER OF INSURANCE, GOVERNMENT OF INDIASIMLA 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

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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

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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

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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

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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

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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

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    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

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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

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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.

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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 144