Shyamapada Chakrabertty & Ors Vs.
The Controller of Insurance, Government of India  INSC 354 (13 December
GUPTA, K.C. DAS AYYANGAR, N. RAJAGOPALA
CITATION: 1962 AIR 1355 1962 SCR Supl. (2)
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.
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, 
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 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.
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 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 affect 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
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
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 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 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 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 there for 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,
[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 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
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 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 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
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
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.