National Insurance Co. Ltd vs Life Insurance Corporation of India

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 134 of 1961

Decision Date: 4 March 1963

Coram: M. Hidayatullah, P.B. Gajendragadkar, J.C. Shah

National Insurance Co. Ltd filed a petition against Life Insurance Corporation of India and the matter was heard by the Supreme Court of India on 4 March 1963. The judgment was authored by Justice M. Hidayatullah, who was joined by Justices P. B. Gajendragadkar and J. C. Shah. The parties were recorded as the petitioner, National Insurance Co. Ltd, and the respondent, Life Insurance Corporation of India. The decision was dated 04/03/1963 and the bench composition was listed as M. Hidayatullah, P. B. Gajendragadkar and J. C. Shah. The case citation appeared as 1963 AIR 1911 and 1964 SCR (2) 182. The dispute concerned the construction of the Life Insurance Corporation Act, 1956, specifically the meaning and scope of “controlled business” and whether that definition included capital redemption business and annuity certain business undertaken by a composite insurer.

The court’s headnote observed that the appellant company was undeniably a composite insurer because it carried on general insurance business in addition to the business that fell within the definition of “controlled business.” The company also engaged in both capital redemption business and annuity certain business, which it collectively described as capital‑obligation business. Under section 7(1) of the Life Insurance Corporation Act, 1956, all assets and liabilities relating to the “controlled business” of every insurer were to be transferred to, and vested in, the Life Insurance Corporation on the appointed day. Consequently, the Life Insurance Corporation assumed control of the life‑insurance portion of the appellant’s business. A dispute subsequently arose concerning which parts of the appellant’s business and assets vested in the Corporation. The appellant argued that, on a proper reading of the relevant provisions of the Act, particularly the explanation to the definition of “controlled business,” the capital‑obligation business—including capital redemption and annuity certain business—did not vest in the Corporation. The respondent contended that this business also vested in the Corporation. The controversy was referred to the Life Insurance Corporation Tribunal in Nagpur, which ruled in favor of the Corporation, prompting the appellant to seek special leave to appeal to this Court. In the appeal, it was submitted that the word “only” in the explanation to section 2(3) of the Act signified that if an insurer carried on life business together with capital redemption business or annuity certain business, and no other type of business, then those additional businesses could be included in the definition of “controlled business.” Conversely, where an insurer also carried on general business such as fire or marine insurance, the capital redemption or annuity certain business could not be treated as part of the “controlled business.” It was further submitted that the phrase “business appertaining to his life insurance business” in sub‑clauses (i) and (ii) of section 2(3) should be given the same meaning. The Court held, that on an interpretation of section 2(3) and the Explanation…

The Court held that, for the purpose of the statutory scheme, the capital redemption business and the annuity certain business must be treated as part of the expression “controlled business” even where the insurer is a composite insurer such as the appellant company. The matter before the Court was a civil appeal numbered 134 of 1961, taken on special leave from the judgment and orders dated 30 December 1959 and 17 May 1960 issued by the Life Insurance Tribunal at Nagpur in case number 33/XII of 1959. The appellant was National Insurance Co. Ltd., while the respondent was the Life Insurance Corporation of India. The appellant was represented by counsel G. S. Pathak, Datta and B. P. Maheshwari, and the respondent was represented by H. N. Sanyal, the Additional Solicitor‑General of India, together with M. C. Setalvad and K. L. Hathi. The judgment was delivered on 4 March 1963 by Justice Hidayatullah. The appeal arose out of two orders of the Life Insurance Corporation Tribunal, Nagpur, dated 30 December 1959 and 17 May 1960, and it concerned the transfer of business and assets from the appellant to the newly created corporation under the Life Insurance Corporation Act, 1956.

The Life Insurance Corporation Act, 1956 (31 of 1956), was enacted to nationalise all life‑insurance business in India by transferring such business to a corporation that would be established for that purpose, and to provide for the regulation and control of the corporation’s business and related matters. The corporation created by the Act is the Life Insurance Corporation, which assumed the life‑insurance business of National Insurance Co. Ltd. among other companies. The dispute centred on two principal questions: which portion of the appellant’s business vested in the corporation and what constituted the assets of that business. The Act provided that the corporation would be established with effect from a date appointed by the Central Government through a Gazette notification; 1 September 1956 was so notified and defined as the “appointed day” and also as the “appointed date” for the purposes of the Act. Section 7(1) of the Act required that, on the appointed day, all assets and liabilities appertaining to the “controlled business” of every insurer be transferred to and vested in the corporation. Before the Act, President’s Ordinance No. 1 of 1956 had appointed a Custodian who had already taken over management of the business that was later to vest in the corporation as “controlled business”. Under subsection 2 of Section 7, the assets of the controlled business were defined to include every right, power and piece of property, whether movable or immovable, such as cash balances, reserve funds, investments, deposits, and all interests and rights arising out of those properties that were in the insurer’s possession, together with all books of account and documents relating to the controlled business. In the same manner, the liabilities were deemed to include all debts, liabilities and obligations of any kind that existed or accrued in connection with the controlled business.

In this case the Court examined the meaning of the expression “assets appertaining to the controlled business of an insurer” as set out in the Explanation to Section 7. The Explanation provided that, for a composite insurer, the expression included the portion of the paid‑up capital of the insurer or assets representing that portion which had been allocated to the controlled business in accordance with the rules made for that purpose. The term “Composite insurer” was defined as an insurer that carried on the controlled business and at the same time carried out any other kind of insurance business. The definition of “Controlled business” was then considered. It stated that for any insurer specified in sub‑clause (a) or sub‑clause (b) or clause (9) of Section 2 of the Insurance Act and engaged in life‑insurance business, “controlled business” meant (a) the entire business of the insurer where the insurer carried no other class of insurance business, and (b) all the business that pertained to its life‑insurance business where the insurer also carried other classes of insurance business. An accompanying Explanation clarified that an insurer was said to carry no class of insurance business other than life insurance if, besides life insurance, it carried only capital‑redemption business or annuity‑certain business or both, and that the phrase “business appertaining to his life insurance business” should be interpreted accordingly.

The appellant Company was admitted to be a composite insurer because it conducted general‑insurance business in addition to the businesses that fell within the definition of “controlled business”. The Company also conducted capital‑redemption business and annuity‑certain business, which it collectively recorded in its books as “Capital Obligation Business”. On the appointed day the controlled business of the Company vested, by operation of law, in the Corporation together with all assets and liabilities that pertained to that business. The Company argued that a proper construction of the provisions, particularly the Explanation to the definition of “controlled business”, excluded the Capital Obligation Business from the vesting, asserting that the capital‑redemption and annuity‑certain components should not have transferred to the Corporation. The Corporation, in contrast, maintained that those components were part of the controlled business and therefore also vested in it. This disagreement was referred to the Tribunal, which ruled in favour of the Corporation. The Company subsequently filed the present appeal, obtaining special leave from this Court.

Counsel for the Company, Mr G S Pathak, contended that the words “only” and “accordingly” in the Explanation must be given their ordinary meaning. He argued that the word “only” indicated that the capital‑redemption and annuity‑certain businesses would vest as part of the controlled business only if the insurer carried no other kind of insurance business. Accordingly, where an insurer carried life insurance together with capital‑redemption or annuity‑certain business but no other business, those businesses could be included in the controlled business; however, where the insurer also carried general business such as fire or marine insurance, those businesses could not be included. He further submitted that the phrase “business appertaining to his life insurance business” in the definition should be interpreted in the same manner. The Court ultimately found this argument unpersuasive and rejected it.

In the case under consideration, the parties argued about the meaning of the term “controlled business” when an insurer carried both life insurance and either capital redemption business, annuity certain business, or both, but no other type of insurance. The argument asserted that if an insurer dealt only with life business and the two named businesses, then the controlled business could be understood to include, in addition to life business, the capital redemption business and the annuity certain business, either separately or together. Conversely, the argument held that when an insurer conducted life business together with a general line of business such as fire or marine insurance, the capital redemption business or the annuity certain business, or both, could not be part of the controlled business. The counsel further maintained that the phrase “business appertaining to his life insurance business” found in sub‑clauses (i) and (ii) of the definition should be given the same limited meaning.

The Court rejected this line of reasoning. It observed that the definition of “controlled business” was intended to cover two categories of insurers: (i) insurers that carried only life business, and (ii) insurers that carried a composite business, meaning they also engaged in other classes of insurance that did not fall within the meaning of “controlled business.” Under sub‑clause (a) of section 2(3)(i), when an insurer carried no other class of insurance besides life, the entire life business of that insurer was deemed “controlled business.” Under sub‑clause (b), for a composite insurer, all business that “appertains to his life insurance business” was included in the controlled business. In both situations, the purpose was to encompass all business that related to life insurance. In the first category, the term meant the whole business of the insurer; in the second, it meant the portion that was life business and excluded other lines.

The Court explained that the explanatory note attached to the definition clarified what constituted life business and was meant to serve the purposes of sub‑clauses (a) and (b). The note first identified an insurer who, besides life business, carried only capital redemption business, annuity certain business, or both, as one who “carries no class of insurance business other than life insurance business.” The word “only” was interpreted to indicate that the insurer could have life business together with the two named businesses, but no other class of insurance. Consequently, an insurer engaged in life business and either one or both of the named businesses was still regarded as carrying no business other than life insurance. The note then directed that the phrase “business appertaining to his life insurance business” in sub‑clause (b) should be construed “accordingly,” meaning in the same manner as described in the first part of the explanation. Applying this interpretation to a composite insurer, the Court concluded that the “controlled business” would include, within the life insurance business, those

The Court explained that the expression “businesses which go with the life business” referred, in the first part of the explanation, to the capital redemption business, the annuity‑certain business, or both of them. Both the grammatical construction and the ordinary sense of the words led to the same conclusion. The Court observed that for the learned counsel’s argument to succeed, the word “only” would have to be moved from its present position to the end of the first part of the explanation so that it would control the whole sentence rather than just a portion of it. The Court held that such a repositioning was not permissible. Consequently, the Court opined that, even for a composite insurer such as the appellant Company, the capital redemption business and the annuity‑certain business must be read as part of the phrase “controlled business.” Because of this interpretation, the Company’s initial contention was rejected. The dispute then turned to the assets that formed the Capital Obligation Business – a term that embraces both the capital redemption business and the annuity‑certain business – and the Court set out the factual background. The Company had maintained a fund called the Capital Obligation Fund, which showed a balance of Rs 12,80,882‑8‑9 as at 31 August 1956. When the Corporation was established, the Company transferred all policies relating to that Fund to the Corporation, and the liability attached to those policies as on 31 December 1955 was Rs 12,88,727. Accordingly, the Company was required to deliver to the Corporation either cash or investments of equivalent value. On the day before the assets were to be transferred, the Company altered its investment holdings that related to its life business and its general business. Those alterations included both investments that were approved under section 27 A of the Insurance Act and other investments that were not approved. The Company’s actual step was to move certain unapproved investments, at their book values, into its Capital Obligation Business and then to hand them over to the Corporation. The Corporation refused to accept those unapproved items and instead asked the Company either to provide stocks and shares at their proper market values or to permit the Corporation to select stocks and shares from the pool of investments. The Company argued that the Corporation had no right to “pick and choose” among the various investments. The Company further stated that it had already transferred all gilt‑edged securities from both the life portfolio and the Capital Obligation Fund into its general business, leaving only unapproved investments whose book value was sufficient to cover roughly Rs 12,87,000, the amount representing the Capital Obligation Business. The Corporation, however, valued those remaining investments at only half of their book value. The Tribunal later set aside the entries that related to the investments in various sundry funds. The Company contended that the Tribunal reversed only a limited number of the book entries that had been made on the eve of vesting, that it did not reverse all such entries, and that it failed to restore the position that existed on 31 December 1955. The Company also maintained that the Corporation should not be permitted to pick and choose among the investments. The Court noted that the arguments concerning “picking and choosing” and the reversal of entries lost their effect because, before the Tribunal’s decision, the Company had already conceded that the Corporation could select any investments of the value of Rs 12,80,890 representing the Capital Obligation Business.

The Court recorded that the Corporation had expressly conceded that it was entitled to select any investments whose total value amounted to Rs 12,80,890, and that such investments constituted the Capital Obligation Business. In light of this explicit concession, the Court observed that the arguments which the appellant now attempted to raise could not arise, because the matter had already been settled by the Corporation’s admission. Accordingly, the Court found that the appeal possessed no legal merit or substantive force. The Court therefore concluded that the appeal could not succeed. As a consequence, the appeal was dismissed, and the appellant was ordered to bear the costs of the proceedings. The dismissal of the appeal was entered as a final order.