- (1.) HIS is an application by the Official Liquidator of the Karachi Mutual Assurance Co. Ltd. Ajmer (hereinafter called the Company) in liquidation u/s 106 of the Insurance Act No. IV of 1938 and as modified by Act No. 54 of 1955 (hereinafter called the Act) The respondents are the five directors of the company, namely, Sri L. B. Sujan, Messrs. Khemchand Ganga-ram, Messrs. Tolaram Harumal, Sri L. C. Lodha and Sri P. T. Advani.
(2.) THE allegations in the application are that the company was originally incorporated and registered with the Registrar of the Joint Stock Companies of Karachi, now in West Pakistan, in the year 1945. THE company secured registration certificate from the Controller of Insurance in March 1946 for doing life business. As the company did not deposit in the Reserve Bank of India the amount as provided in sub-sec. 2 of sec. 98 of Act, the Controller of Insurance on 1st March, 1951 cancelled the registration certificate issued by him to the company and the said order was to take effect from 27th April, 1951. THE Controller of Insurance on 9th September, 1953 applied to the District Court at Ajmer for compulsory winding up of the company and the court made a winding up order on 16th April, 1955 and Sri J. B. Hingorani was appointed its Official Liquidator. On going into the records the Liquidator found that the company had borrowed from the directors and other persons on fixed and temporary deposits a sum amounting to Rs. 1,06,000/-and out of this Rs. 52,000/- were payable on fixed deposit receipts which matured on 31st December, 1950. In September the Managing Director sought an opinion from their solicitors Messrs. Little & Co. , Bombay if the depositors could claim a charge or lien on the company's deposits made in the Reserve Bank of India under sub sec. 2 of sec. 98 of the Act and he was advised that they could not. THEreafter the company at the end of 1950 was not able to pay any amount on the fixed or temporary deposits. THE Directors with the fraudulent intention of making available the amount deposited with the Reserve Bank of India u/s 98 (2) of the Act to themselves and to some other depositors converted their deposits of the value of Rs. 52,000/- into single premium policies and issued the same maturing on expiry of 5 years. Out of the single premium policies of Rs. 52,000/- the policies of the value of Rs. 28,000/- were issued in favour of the Directors and the remaining of Rs. 24,000/- in favour of others. THE Official Liquidator repudiated the liability of the company in respect of Rs. 28,000/- the amount due to the Directors but had to allow the claim of the other depositors of the amount of Rs. 24,000/- because after a period of 6 months of the issue of the policies they could not be repudiated on the ground of undue preference, so far as other depositors were concerned. THE Directors as that very sitting also resolved to transfer the affairs of the company to another insurance company. It has been stated that by converting the deposits to the extent of Rs. 24,000/- into single premium policies the respondents have misapplied money deposited in Governments securities in the Reserve Bank of India which was intended only for bonafide policy holders and not for payments of other debts and thus the provisions of sec. b of the Act have been contravened and the respondents have committed an act of misfeasance or mal-feasance u/s 106 of the Act. The Official Liquidator had applied to the Attorney General who was then the Advocate General for the State of Ajmer for according sanction under clause (1) of sec. 7 of the Act for filing the present application and the sanction was received on 31st October, 1956. Thereafter the State of Aimer merged into the State of Rajasthan from 1st November, 1956 and hence no application could be filed in the court of the Judicial Commissioner, Ajmer and after obtaining the sanction of the Advocate General of Rajasthan the present application has been filed. It has been prayed that the respondents be ordered jointly and severally to contribute the sum of Rs. 24,000/ -. A reply has been filed on behalf of the respondents Nos. 1 to 4 Respondent No. 4 has not filed any reply It has not been denied that the company was originally incorporated and registered with the Registrar of Joint Stock Companies at Karachi in the year 1945 and that the registration certificate was secured from the Controller of Insurance in March 1946 for doing life business It is however pleaded that respondents ceased to be Directors from 9th January 1951 and as such they have no knowledge of the cancellation of the registration certificate. It has been stated that the company suffered a financial set back as a result of the partition of the country and so the amount could not be deposited as required by sec. 98 of the Act. It has been admitted that the winding up order has been passed by the District Judge, Ajmer, but it has been contended that he had no jurisdiction to pass a winding up order and appoint an Official Liquidator. It has been admitted that legal opinion was sought from|the company's solicitors Messrs. Little & Co. , Bombay from time to time to safeguard the interest of the company and the insurers and due weight was given to the said opinion It has not been denied that the company at the end of 1950 was not able to pay any amount in respect of fixed or temporary deposits and it has been submitted that the record will itself show as to what the position of the company was then Although it has been admitted that the respondents issued single premium policies of the value of Rs. 24,000/- payable after 5 years, yet it has been pleaded that the said policies were issued by the Directors against valid premium quotation supplied by the company's actuary and duly filed with the Government of India and entered in the company's balance sheets which were duly audited and checked by Chartered Accountant and field with and accepted by the Controller of Insurances. It has been denied that it was with any fraudulent intention that fixed deposits were converted into single premium policies. It has been denied that any policy was issued in favour of respondent No, 1 Sri L. B Sujan It has been pleaded that company's business was transferred to another insurance company in obedience to the Government of India's directions to transfer the business to another insurance company. It has been asserted that the securities in the Reserve Bank of India were never reduced and in spite of the policies they remained as they were and no act of malfeasance or misfeasance has been committed u/s 106 of the Act, and there was no violation of the provisions of sec. 8 of the Act. It has been pleaded that a similar petition was filed by the applicant before the Judicial Commissioner, Ajmer and was dismissed and the present application was, therefore, not legally maintainable. It has been added that one of the Directors Rai Sahib Verumal Pessumal being a Director of the company stood on par with the respondents and ought to have been joined as a party and that the applicant has purposely omitted to make him a party The application was therefore bad for non-joinder of the said Rai Sahib Verumal It has been pleaded that according to the memorandum and Articles of Association of the company the Managing Director respondent No. 1 was an employee of the company and acted under the directions of the Board and as such he is not liable and exempted under clauses 52 and 53 of the Articles of Association and that the respondents Nos. 2 to 5 are similarly protected and indemnified under Article 95. It has been stated that the respondents have acted bona fide and in the best interest of the company and with due diligence and as such also they are entitled to benefit u/s 108 of the Act and the application deserves dismissal. I have heard Sri J. B. Hingorani, the Official Liquidator on behalf of the applicant and Shri R. K. Bhargava on behalf of the respondents. The following points emerge for decision from the arguments of the parties: - (1) Whether the order of the winding up of the company by the District Judge, Ajmer, dated 16th April, 1955 is a valid order? If not, what is its effect on the application? (2) Is the application bad for the non-joinder of Rai Sahib Verumal Pessumal? (3) Is the application not maintainable on account of the dismissal of the previous similar application by the Judicial Commissioner, Ajmer? (4) Whether the conversion of the fixed deposits of Rs. 24,000/- in question into single premium policies of 5 years was in contravention of the Act and does it diminish the life insurance fund within the meaning of sec. 116 of the Act ? If so, are the respondents or any of them liable to contribute the whole or any part of the sum of Rs. 24,000/- by way of compensation? I take up these points one by one. Point No. 1: - Whether the order of the winding up of the company by the District Judge, Ajmer dated 16th April, 1955 is a valid Order ? If not, what is its effects on the application? It has been argued by Sri R. K. Bhargava on behalf of the respondents that under the Companies Act of 1913 (hereinafter called the old Companies Act), which was applicable at the time the winding up application was made, only the High Court was the Court which had jurisdiction under the Act, unless the Central Government by notification and subject to such restrictions and conditions, as it thought fit, empowered any District Court to exercise all or any of jurisdiction by the Act conferred upon the Court, and in that case such District Court was, as regards the jurisdiction so conferred to be the Court in respect of all companies having their registered offices in the district. It was argued that the District Judge of Ajmer was by notification of the Central Govt. and that of the Chief Commissioner of Ajmer Merwara, mentioned at the foot* [ (1) Home Deptt. Notification No. F. 126/37, dated the 1st April, 1937. (2) Notification No. 1214 C/162, A/40, dated 17th September, 1940 of the Chief Commissioner, Ajmer-Merwara. ] empowered to exercise all the jurisdiction conferred by the old Companies Act upon the Court in respect of all companies having their registered offices in the State of Ajmer-Merwara. The registered office of the company was not within the Ajmer State, but had been at Karachi and therefore the District Judge Ajmer, could not by virtue of the notification, mentioned above, have jurisdiction to entertain the winding up petition and pass a winding up order and appoint an Official Liquidator. It is true that the powers conferred upon the District Judge, Ajmer were in respect of all companies having their registered offices in the District, but the High Court also u/s 3 (1) of the old Companies Act had jurisdiction in the place at which the registered office of the company was situate. A District judge, therefore, who had been empowered by the Central Government, under the proviso to sec. 3 (1) of the old Companies Act, could have the same powers as the High Court in respect of the matters as in relation to which power had been given to him. Now under the notification, mentioned above the District Judge of Ajmer had powers to entertain and decide application for winding up of the company the registered office of which was within the then Ajmer State. It is no doubt true that the registered office of the company was not situate within the State of Ajmer at the time the application for winding up was made and decided. However sub-section 3 of sec. 3 of the old Companies Act says - "nothing in this section shall invalidate a proceeding by reason of its being taken in a wrong Court. " It comes to this that provided a court had jurisdiction under section 3 (1) any proceedings taken therein will not be invalidated simply on the ground that it had no territorial jurisdiction in the matter. Learned counsel for the respondents conceded that if the proceedings were taken in a High Court which had no territorial jurisdiction in the matter, they would not have been invalidated simply on that ground. I do not understand why the proceedings taken in a District Court empowered u/s 3 (1) should be invalidated on the ground that it had no territorial jurisdiction. If the proceedings taken in a High Court which had do territorial jurisdiction are not invalidated on that ground along, proceedings taken in a District Court empowered under sec. 3 (1) cannot also be invalidated on the ground of want of territorial jurisdiction. Of course if the District Judge had not been empowered at all, proceedings taken in that court could have been invalidated because in that case there would have been an inherent lack of jurisdiction but when there is no inherent lack of jurisdiction, and there is only want of territorial jurisdiction, proceedings taken either in a wrong High Court or District Court empowered under sec. 3 (1) cannot be invalidated and sub-sec. 3 of sec. 3 saves those proceedings. Point No. 21 - Is the application bad for the non-joinder of Rai Sahib Verumal Pessumal? It has been argued by the learned counsel for the respondents that the application is bad for the non-joinder of Rai Sahib Verumal Pessumal. It is true that this Rai Sahib was also one of the Directors of the company on the date of the resolution in question, but he was not present at the meeting. He could not therefore be said to be a party to the resolution of 9th January, 1951 and the Official Liquidator may be justified in not making him a party. I do not think that the application is bad for the non-joinder of Rai Sahib Verumal Pessumal. Learned counsel for the respondents also conceded in the end that this point has got no force. Point No. 3: - Is the application not maintainable on account of the dismissal of the previous similar application by the Judicial Commissioner, Ajmer? The previous application was made by the Official Liquidator before the Judicial Commissioner, Ajmer but it was dismissed on the preliminary ground-that sanction of the Attorney General had not been obtained. It was not dismissed on merits. No law has been cited before me that an application like the present will be incompetent simply because a previous similar application was dismissed on the preliminary ground that sanction of the Attorney General or Advocate General had not been obtained. Learned counsel for the respondents also conceded in the end that this ground has no force. Point No. 4 - Whether the conversion of the said fixed deposits into single premium policies of 5 years was in contravention of the Act and does it diminish the life insurance fund within the meaning of sec. 106 of the Act? If so, are the respondents or any of them liable to contribute the whole or any part of the sum of Rs. 24000/- by way of compensation? It is quite clear from the balance sheet of the year 1950 field in this case that the company had overdrawn a total sum of Rs. 6017/1/12/6 from various banks and it had to pay a total sum of Rs. 60,300/- on fixed deposits with interest and a sum of Rs. 3950/- on deposits without interest. This amount could not be paid out of the amount with the Reserve Bank of India deposited u/s 98 of the Act unless the entire dues of the policy-holders had been paid. The depositors therefore could not expect to rank with the policy-holders in the matter of payment of their dues. It would appear that among the depositors there were the respondents themselves whose fixed deposits amounted to about Rs. 28,000/- in the year 1950 and there were other depositors whose deposits totalled Rs. 24,000/ -. It is quite clear that the respondents who were the Directors could not expect to get a substantial amount of their deposits and that they could expect only a very small proportion of their deposits, if at all. At any rate they would have got much less than what the policy-holders would have got. It appears from the copy of the minutes of the meeting of the Board held on 24th September, 1950 that the five respondents were present at that meeting and that a letter from Messrs. Little and Co. , company solicitors in Bombay was read and the Managing Director reported that the five years fixed deposits totalling Rs. 53,000/- acknowledged by the company would all mature for repayment as under : - (a) Rs. 34500/- by 31st December, 1950; and (b) Rs. 18500/- by 31st December, 1950. It also appears from these minutes that on account of the losses suffered as a result of the partition of British India and of the fact that the greater part of the company's assets was deposited with the Reserve Bank of India under the provisions of the Act there would not be sufficient cash immediately available with which to repay the deposit receipt-holders their said deposits. It was therefore unanimously resolved that the Managing Director be authorised to approach the holders of five years fixed deposit receipts maturing on or before 31st December, 1950 and request the individuals concerned to the extension of the dates of the maturity of their fixed deposits receipts by a period of 24 months from the respective dates of maturity of their deposit receipts. Then there is the copy of the meeting of the Board of Directors dated 9th January, 1931. In this meeting also the five respondents were present. At first a resolution was passed that the company be amalgamated with some other sound insurance company. Then a resolution was passed that the fixed deposits of certain depositors be converted into single premium policies for 5 years. There were 13 such depositors including the 5 respondents whose fixed deposits were converted into the single premium policies repayable after 5 years. Out of them Nos. 9 to 13 were the five respondents and Nos. 1 to 8 were other persons. About the conversion of the last unauctioned eight deposits the applicant has complained in this application. It will appear that the conversion of the fixed deposits into single premium policies for 5 years had the effect of bringing these fixed depositors into line with the policy-holders and they could claim the same proportion out of the money deposited in the Reserve Bank u/s 98 of the Act as the policyholders. In case they remained mere depositors, they could not claim anything out of the money in the Reserve Bank of India deposited u/s 98 of the Act. Now it would appear from the balance sheet that the amount deposited with the Reserve Bank u/s 98 was in fact the principal amount out of which anything could be paid to the policy-holders, if the Directors had not converted the fixed deposits of this substantial amount of about Rs. 53,000/- the entire amount deposited with the Reserve Bank would have gone to those who had their policies on the date of the above mentioned resolution. By converting the fixed deposits into single premium policies repayable after 5 years the respondents made the depositors rank equal with the policy-holders and these depositors could claim the same proportion out of the said money as the existing policy holders. The proportion, therefore which became distributable to the policy holders, fell much below the proportion which they were entitled to and it can therefore be said without hesitation that there was diminution in the life insurance fund. If new claimants to the extent of Rs. 50,000/- out of the life insurance fund are brought in, the result would be the same as if Rs. 50,000/- are taken out of it. The argument of the learned counsel for the respondents therefore that the amount in the life insurance fund remained the same as it was even though the fixed deposits were converted into single premium policies is absolutely without any force. The question that has to be examined is whether it was by contravention of any of the provisions of the Act that this diminution in the life insurance fund resulted. The object of the Act is that policy-holders might be protected and they might be able to get their dues on the maturity of their policies. Different provisions have been made in the Act to safeguard this interest of the policy-holders. It is with this view that u/s 7 insurance companies have been enjoined to deposit and keep doposited with the Reserve Bank of India for or on behalf of the Central Government cash or approved securities equivalent to one-third of the premium money subject to maximum of Rs. 2,00,000/- U/s 8 it has been provided that any deposit made u/s 7 shall be deemed to be part of the assets of the insurer and shall not be susceptible of any assignment or charge nor shall it be available for the discharge of any liability of the insurer other than the liabilities arising out of policies of insurance issued by the insurer so long as any such liabilities remain undischarged. . . . . . . . . Under sub-sec. 2 of sec. 7 where a deposit is made in respect of life insurance business the deposit made in respect thereof shall not be available for the discharge of any liability of the insurer other than the liabilities arising out of the policies of life insurance issued by the insurer. U/s 98 method has been prescribed for the deposit in case of mutual insurance companies and co-operative insurance societies in respect of the life insurance business. Thus it is quite clear that if any Director acts in such a way that the proportion payable to the policy-holder out of the deposit made u/s 7 or sec. 98 is reduced, he does an act by which the deposit made in respect of life insurance business shall not be available for the discharge of the liability of the insurer arising out of the policies of the assured to the same extent of which it would be available in case that act were not done. Such an act is certainly in contravention of S. 98 of the Act. The Directors of the company being the guardians of the company were in duty bound to see that by no act of theirs was the life insurance fund reduced for distribution among the policyholders who held their policies before the resolution of 9th January, 1951 was passed. It was held by Patna High Court in Peninsular Locomotive Co. , Ltd. vs. H. Langham Reed (1) that the assets of the company are entrusted to the directors to be applied to certain defined objects and they are responsible as far a breach of trust they apply them to other objects. Of course the respondents in the present case had certain obligations towards the depositors also, but the interest of the policy-holders was supreme and had to be safeguarded to the best of the ability of directors. The life insurance fund could not be touched by the depositors unless the claims of the policy-holders were fully satisfied. The fixed depositors had invested their money with their eyes open that they would not be able to claim anything out of the life insurance fund unless the policy holders had their claims fully satisfied. In order to pay them a larger amount the directors were not at all justified in reducing the proportion of the existing policy holders out of the life insurance fund. If it were a case of one or two individuals it might have been possible to say that it was an error of judgment, but in this case there are many as 13 fixed depositors including the five directors themselves for the benefit of whom the life insurance fund has been made available to a lesser extent to the policy-holders who held their policies on 9th Jan. , 1951 than it would have been if the resolution of the said date were not passed, It can therefore be justifiably held that the resolution of 9th Jan. , 1951 by which the fixed deposits of 13 depositors were converted into single premium policies for five years was not bonafide but was passed with an intention to benefit the depositors at the expense of the policy holders then existing. It is also notable that the fixed deposits were converted into single premium policies payable after a short period of 5 years. The action of the directors was, therefore, very reprehensible and in contravention of the Act and they are liable to make good the loss they have caused to the policy-holders by passing the resolution dated 9th January, 1951. According to the affidavit of the Official Liquidator he has paid dividend at the rate of five annas in a rupee to the policy holders and feels pay-ing further dividend of anna one more of the funds in his hand and if he is likely to get further contributions he might pay further dividends at the rate of annas two in a rupee. Thus actually he has paid only five annas in a rupee to the depositors of Rs. 24,000/-whose fixed deposits have been converted into single premium policies. At present therefore he is entitled to get only five annas in a rupee on the amount of Rs. 24000/ -. This comes to Rs. 7,5000/ -. This Court would not be justified at present in making an order of reimbursement of that proportion which has not yet been paid but which might be paid in future because after all according to the admission of the Official Liquidator himself about an anna in a rupee would be possible to be paid to the fixed depositors also. At that time it would be possible for the Court to ascertain as to whether deducting the amount which might have been paid to the fixed depositors, even though their fixed deposits had not been converted into single premium policies, there remains any amount which had to be paid to these policy-holders on account of the resolution dated 9th January, 1951. At present I do not think that it would be proper to order the recovery of any amount more than what has actually been paid to the eight fixed depositors in question on their single premium policies. The application is, therefore, allowed and it is ordered that a sum of Rs. 7,500/-at present shall be realised jointly and severally from the respondents Nos. 1 to 5 and in case anything more is paid to the policy-holders, the Official Liquidator shall move this Court for the recovery of whatever additional sum might be found to have been paid to the above eight fixed depositors over and above what might have been paid to them if their fixed deposits had not been converted into single premium policies. In the circumstances of the case, the Official Liquidator shall get half the costs of this petition from the respondents. . ;