Life Insurance Corporation Of India vs S. V. Oak And Another

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 443 of 1962

Decision Date: 29 September 1964

Coram: M. Hidayatullah, P.B. Gajendragadkar, K.N. Wanchoo, Raghubar Dayal, J.R. Mudholkar

In this matter the parties were Life Insurance Corporation of India as the petitioner and S V Oak together with another individual as the respondents. The case was decided by the Supreme Court of India on 29 September 1964. The judgment was recorded by Justice M Hidayatullah and the bench also comprised Justice P B Gajendragadkar, Justice K N Wanchoo, Justice Raghubar Dayal and Justice J R Mudholkar. The citation for the decision is reported in the 1965 volume of the All India Reporter at page 975 and also in the Supreme Court Reporter (1965) at page 403. The statutory framework examined in the case was the Life Insurance Corporation Act of 1956, specifically sections 9 and 28, and the Court was called upon to interpret the meaning of “surplus” under those provisions.

The factual background disclosed that the respondents had placed deposits with a mutual life‑insurance company. The Controller of Insurance had issued a direction that those deposits should be repaid out of any future valuation surplus, and the respondents had consented to that arrangement. While the mutual insurer was operating, it failed to demonstrate any valuation surplus as determined by actuarial investigations required under the Insurance Act of 1938. Consequently, the company was, in the view of the Insurance Act, insolvent at the time when it was taken over by the Life Insurance Corporation. When the business of the insolvent company was merged into the business of the Corporation, the two entities became indistinguishable after 1 September 1956, the date on which the Life Insurance Corporation Act (XXXI of 1956) came into force. After the merger the Corporation’s accounts reflected a substantial valuation surplus. Relying on the surplus, the respondents asserted that the condition on which their deposits were held had been satisfied and therefore the Corporation was obliged to return the deposits together with interest. The Corporation declined to make the payment and the dispute was referred to the Life Insurance Tribunal. The Tribunal concluded that the contracts that existed immediately before the date of vesting were no longer subsisting or enforceable because there was no surplus of the type contemplated by the original agreement. The depositors then filed a petition under Articles 226 and 227 of the Constitution in the High Court, which set aside the Tribunal’s order and restored the claim for repayment. The Corporation appealed that decision to this Court. The Court held that the appeal must be dismissed. In its reasoning the Court observed firstly that it was incorrect to argue that the absence of a surplus on 1 September 1956 extinguished the company’s contingent liabilities; the contracts continued to exist as long as the company was in operation, although the actual payments were deferred until the actuarial surplus condition was fulfilled. Under section 9 of the Life Insurance Corporation Act, the contractual liabilities of the original company passed to the Corporation, and there was no express provision in the Act that negated that transfer. Because the Corporation possessed an actuarial surplus, the amounts claimed by the respondents became payable from that surplus. Secondly, the Court noted that sections 9 and 28 of the Act do not obstruct the Corporation from meeting its obligations under section 9. The surplus referred to in section 28 is the surplus that arises from an actuarial investigation carried out under the Insurance Act, and the Act requires that such surplus be disposed of in accordance with its provisions.

It was held that the surplus of the Corporation had to be allocated in accordance with the statutory requirement that not less than ninety‑five percent of such surplus be set aside for the benefit of the Corporation’s policyholders. The remaining portion of the surplus could be employed for other purposes only in a manner that might be prescribed by the Central Government. In exercising its discretion, the Government was required to take into account the obligations of the Corporation that arose under section nine of the Life Insurance Corporation Act. In the present matter there was no specific direction issued by the Central Government concerning the use of the surplus; consequently the surplus was deemed available for the payment of the deposits in question.

The appeal was filed as Civil Appeal No. 443 of 1962 under the civil appellate jurisdiction, challenging the judgment and order dated 29 July 1960 of the High Court of Bombay in Special Civil Application No. 279 of 1960. The appellant was represented by counsel appearing for the appellant, while counsel appeared for the respondents and for respondents No 1, the interveners, and the Attorney‑General for India. The judgment was delivered by Justice Hidayatullah. The matter arose on an application for a certificate under Articles 226 and 227 of the Constitution, which set aside the decision of the Life Insurance Tribunal, Nagpur, dated 30 December 1959. The dispute concerned the takeover by the Life Insurance Corporation of the business previously controlled by the Continental Mutual Assurance Company Limited, Poona, pursuant to the Life Insurance Corporation Act, 1956 (31 of 1956). The Continental Mutual Assurance Company was a mutual insurance company and therefore possessed no share capital. It had accepted deposits from its directors and other persons, including the respondents V. V. Oak and S. V. Oak, who together made five deposits amounting to Rs 7,408.81 p. in the latter weeks of December 1950 and 1951. These deposits were subject to interest at a rate of four and a half percent per annum. The company had been incorporated in 1946 and was engaged exclusively in life‑insurance business. In compliance with the Insurance Act, 1938 (4 of 1938), it undertook actuarial investigations and valuations at the intervals prescribed by that Act. The first valuation, covering the business as of 31 December 1950, disclosed a loss of Rs 72,924 and a balance‑sheet asset figure of Rs 11,216, which were likely not readily realizable. The company’s certificate of registration was cancelled in 1952, and the Controller of Insurance warned that the company would be wound up if the insolvency was not remedied. In July 1952, all the directors wrote to the Controller, guaranteeing that the deficit would be eliminated before the end of October of that year and indicating that the depositors had consented to defer the return of their deposits until the deficit was corrected. The Controller then revived the registration certificate, but because the deficit persisted beyond the October deadline, the Chairman of the Insurance Company informed the Controller that immovable property valued at Rs 49,000, acquired from the deposits, was being purchased and that the deposits would not be returned except from surplus assets. The Controller responded that the deposits should be repaid from future valuation surpluses rather than from surplus assets, an arrangement to which the Insurance Company and the depositors, including the respondents, agreed.

After the certificate of registration had been revived, the deficit that had been promised to be removed by the end of October 1952 remained outstanding. Consequently, the Chairman of the Insurance Company informed the Controller that immovable property valued at Rs 49,000, which had been purchased with the deposits, would be retained and that the deposits would be repaid only from any surplus that might arise in future valuations, not from the surplus assets themselves. The Controller responded that the deposits should be repaid solely out of future valuation surpluses and not from surplus assets. The Insurance Company accepted this condition, and the depositors, including the respondents, gave undertakings consistent with that direction. The correspondence between the Controller and the respondents was extremely brief and is reproduced verbatim. The letter dated 7 November 1952 from the Assistant Controller of Insurance stated: “With reference to your letter dated the 29th October, 1952, on the above subject, I have to say that the deposits or loans obtained by the Company to cover its insolvency are to be repaid only out of the future valuation surpluses and not out of surplus assets. This may kindly be noted.” The respondent’s undertaking, dated 29 November 1952 and signed by V. V. Oak, read: “I hereby give my consent to keep the amount of my deposit of Rs 7,408-0-0 (Rupees Seven thousand four hundred and eight only), with the company and that the same is repayable only out of adequate surplus along with interest thereon, as from the date of the last valuation, and that these amounts will be allowed to be kept with you till such adequate surplus is shown. The amount of interest payable for the intervening period will be paid out of valuation surplus and to the extent of 7 ½ % of such surplus, with retrospective effect. Yours faithfully, Sd./- V. V. Oak.” This undertaking was given by V. V. Oak on behalf of his son, S. V. Oak.

The financial condition of the Insurance Company did not improve after these arrangements; in fact, it deteriorated further. The actuarial valuation as of 31 December 1954 disclosed a larger deficit of Rs 89,923. Before the next valuation could be prepared, the Life Insurance Corporation Act came into force. Even prior to that, under the Life Insurance (Emergency Provisions) Ordinance, 1956, which was later replaced by Act 9 of 1956, the Government of India took over the business of the Insurance Company on 19 January 1956. Upon the passage of the Life Insurance Corporation Act, the “controlled business” of all insurers was vested in the Life Insurance Corporation effective 1 September 1956. The Act defined “controlled business” to include life‑insurance business and, where an insurer carried on only life‑insurance business, to encompass the entire business of that insurer. Accordingly, the Insurance Company fell within this description, and its whole business vested in the Life Insurance Corporation under section 7 of the Act. Section 9 of the Act then stipulated the general effect of such vesting, providing that all contracts, agreements and other instruments that existed immediately before the appointed day and in which the insurer was a party would, insofar as they related to the controlled business, continue to be fully effective against or in favour of the Corporation as if the Corporation had been the original party.

In this case the Court examined the effect of the vesting provision contained in section 9 of the Life Insurance Corporation Act. The first subsection of that section, which the Court reproduced for the record, stated: “9. General effect of vesting of controlled business. (1) Unless otherwise expressly provided by or under this act, all contracts, agreements and other instruments of whatever nature subsisting or having affect immediately before the appointed day and to which an insurer whose controlled business has been transferred to and vested in the Corporation is a party or which are in favour of such insurer shall, insofar as they relate to the controlled business of the insurer, be of full force and effect against or in favour of the Corporation, as the case may be, and may be enforced or acted upon as fully and effectually as if, instead of the insurer, the Corporation had been a party thereto or as if they had been entered into or issued in favour of the Corporation.” (2)... The Court held that this provision operated to replace the name of the Life Insurance Corporation in place of the former Insurance Company in the deposit contracts executed by the respondents. Consequently the deposits continued to run with full legal force against the Corporation and could be enforced as if the Corporation itself had originally been a party to those contracts.

The Court noted that the Act became operative on the appointed day of 1 September 1956, at which point the Insurance Company ceased to exist in legal terms, a situation described as a “civil death.” While the Insurance Company was still operating it had never produced a valuation surplus under the actuarial assessments required by the Insurance Act; the assessments dated 31 December 1954 had shown a deficit of Rs 89,923. The Court found no reason to believe that any actuarial valuation performed on or after 1 September 1956, or even on 31 December 1956, would have revealed a surplus. In fact the Court concluded that the Insurance Company was insolvent at the moment of its takeover. After the merger of the Insurance Company’s business into the Life Insurance Corporation, the two became indistinguishable from 1 September 1956 onward. The Corporation’s subsequent accounts displayed a large valuation surplus, and the respondents argued that because the condition for which their deposits were held had been satisfied, the Corporation was obligated to return the deposits together with interest from that surplus.

The Corporation, however, opposed this claim, leading to the present litigation. The respondents, after issuing a notice under section 80 of the Code of Civil Procedure, instituted a suit in the Bombay City Civil Court on 5 January 1959 (Suit No. 149 of 1959). The Court was informed that this suit remained pending. In response, the Life Insurance Corporation filed a petition on 5 October 1959 before the Life Insurance Tribunal at Nagpur, seeking a declaration that the respondents were not entitled to the repayment of their deposits and requesting an injunction to restrain the respondents from further pursuing the civil suit in Bombay. This sequence of procedural steps and the substantive arguments concerning the effect of section 9 formed the basis of the dispute before the Court.

In this matter the respondents had filed a suit in the Bombay City Civil Court on 5 January 1959 seeking repayment of deposits that they claimed were due to them, after the insurance company had been taken over. In response, the Life Insurance Corporation filed a petition on 5 October 1959 before the Life Insurance Tribunal at Nagpur, asking the Tribunal to declare that the respondents were not entitled to any repayment of their deposits and to grant an injunction preventing the respondents from continuing the suit in the Bombay City Civil Court. By its order dated 30 December 1959 (Case No. 31/XII of 1959) the Tribunal held that the amount claimed by the respondents was not payable. The Tribunal reasoned that the insurance contracts that existed immediately before the vesting date were not still in force or enforceable because there was no surplus of the kind specified, and therefore the contracts could not be relied upon for repayment. The Tribunal added that the situation would have been different only if the insurance company had generated a surplus before the vesting date, in which case the deposits would have remained to be returned. The Tribunal also rejected a claim made under section 65 of the Indian Contract Act and, having previously sent an injunction to the Bombay City Civil Court, concluded in its final order that, because it had disallowed the claim, the suit for recovery of the deposits could not proceed. The respondents then approached the High Court of Bombay, filing a petition under Articles 226 and 227 of the Constitution (Special Civil Application No. 279 of 1960). The High Court disposed of the petition on 29 July 1960, reversing the Tribunal’s decision. The Divisional Bench of the High Court held that the purpose of the Life Insurance Corporation Act was to take over the controlled business of the insurer exactly as it stood, to realise all assets and to discharge all liabilities arising from contracts relating to that business. Accordingly, the High Court found that the Tribunal had erred in concluding that the insurer’s liability ceased immediately before the vesting date merely because there was no valuation surplus on that date. The Court further observed that, under section 9 of the Life Insurance Corporation Act, the contracts were to be given full force and effect, which meant that the Corporation was obligated to pay the amount from its own business. The Court noted that the Act contained no provision that conflicted with the clear language of section 9, and it rejected the Corporation’s argument that payment was impossible because section 28 required any surplus of the Corporation to be applied in a manner that left no room for such liabilities. The judges interpreted the word “surplus” in section 28 not as a valuation surplus but as the balance remaining after all liabilities, including contingent liabilities, had been deducted. Consequently, the High Court ordered that the matter be remitted to the Tribunal for a fresh decision taking into account the High Court’s conclusions. In the appeal that followed, counsel for the Corporation, Mr Setalvad, argued that the respondents’ undertaking required repayment of the deposits only from an “adequate surplus,” and that the term “surplus” in the undertaking should be understood as a valuation surplus rather than as surplus assets.

The corporation’s counsel argued that the undertakings required the deposit repayments to be made only after an “adequate surplus” became available, specifically an “adequate valuation surplus.” He maintained that the term “surplus” as used in the undertaking should be interpreted to mean the valuation surplus rather than surplus assets. He further explained that the Insurance Act mandated periodic actuarial investigations into the operations of an insurance company, and that the findings of such investigations had to be presented in accordance with the Act and its first four schedules. According to his submission, the results of these investigations were reflected in Forms A through I, the final form being the valuation balance sheet. This balance sheet compared the net liability arising from the business, as shown in the summary and policy valuations, with the balance of the Life Insurance Fund as presented in the balance sheet, thereby determining whether there was a surplus or a deficiency. He asserted that the word “surplus” possessed a technical meaning in this context, not the ordinary meaning adopted by the High Court, and he cited the Controller’s memorandum dated 7 November 1952 to support this view. Consequently, he contended that the contracts could not be enforced because no valuation surplus existed, and that the amount could be paid only from such a surplus. Alternatively, he argued that if repayment had to be made from the valuation surplus, section 28 of the Life Insurance Corporation Act rendered the payment impossible, and therefore the Tribunal’s decision was correct.

In response, counsel for the respondents, together with counsel for the interveners, argued that section 9 of the Life Insurance Corporation Act was clear in its language and that no other provision of the Act, such as sections 14, 15, or 36, overridden it. They maintained that reliance on section 28 did not produce the result suggested by the corporation’s counsel; and if it did, section 28 would have to be declared ultra‑vires of the Constitution under Articles 19 and 31 because it would deprive the respondents of property without compensation. The Solicitor‑General, representing the Government of India, opposed the ultra‑vires contention, asserting that section 28 was not unconstitutional and could be interpreted in the same manner as section 29, as argued by the interveners’ counsel. He reiterated that the Insurance Act required actuarial valuations of a life‑insurance business at prescribed intervals, and that the outcomes of these valuations were to be incorporated in a series of forms (A to I) in accordance with the regulations laid down in the first four schedules, with Form A representing the balance sheet of the company’s business, showing assets and liabilities.

Form A reflected the balance sheet of the Company’s business, displaying the assets and liabilities of the Company within India. Form B presented the account of profit and loss for the same period. Form D incorporated the outcomes of the Insurance Company’s operations during the investigation interval, taking into account the figures from the balance sheet and the profit‑and‑loss account, and it set out the balance of the Insurance Fund at the conclusion of that interval. The Insurance Fund served as the financial cover for the insurance liabilities under the policies, and its amount was required to be invested in approved securities, the list of which had to be recorded in Form AA. The value of those securities represented the state of the Fund. A Consolidated Revenue Account was prepared in Form G, in which all items of the company's working were compiled and the final amount of the Life Insurance Fund was determined. Form H provided a summary of the actuarial valuation of all policies and the net liability arising from them. The net liability shown in the policy‑valuation summary and the balance of the Life Insurance Fund shown in the balance sheet were then compared in Form I to ascertain whether a surplus existed. It was from this actuarial surplus that the payments for the deposits were to be made. This procedure was universally acknowledged. It was erroneous to argue that because the Insurance Company possessed no surplus on 1 September 1956, its contingent liabilities had ceased on that date. The contracts remained in force as long as the Insurance Company continued its business, although the actual payments were deferred until the condition of an actuarial surplus was satisfied. The existence of a contingent liability on 1 September 1956 did not diminish its character as a liability of the Insurance Company at the moment of vesting.

Under section 9 of the Life Insurance Corporation Act, that liability transferred to the Life Insurance Corporation and, according to the explicit language of that provision, the liability continued in full force and effect unless the Act itself contained an express provision that negated it. Sections 14, 15 and 36 of the Life Insurance Corporation Act illustrate express provisions that have been made in relation to certain contracts contemplated under section 9; however, no comparable provision was brought to the Court’s notice for the present purpose, and none exists. Consequently, the contracts were binding upon the Corporation in the same manner as they had been on the Insurance Company, effectively as if the Corporation itself had undertaken the liability. Because the contracts were enforceable, the amounts due had to be paid, provided that an actuarial surplus existed. Since the business of the Insurance Company merged into that of the Corporation, no separate valuation of the former’s business was performed. The Corporation, as the substituted legal person, conducted the business, generated an actuarial surplus, and therefore the amounts were payable from that surplus.

The Court examined the contention that section 28 of the Life Insurance Corporation Act barred the discharge of the liability and, whether expressly or impliedly, prevented recovery. This was the sole argument presented on behalf of the Corporation by counsel for the Corporation. Section 26 of the Act requires the Corporation, at least once every two years, to cause actuaries to investigate the financial condition of its business, to include a valuation of its liabilities, and to submit the actuaries’ report to the Central Government. Section 28 then prescribes the manner of utilisation of any surplus that may arise from such an investigation, stating that not less than ninety‑five per cent of the surplus shall be allocated or reserved for the policy‑holders of the Corporation and that the remainder may be employed for purposes and in a manner determined by the Central Government. Counsel for the Corporation argued that the term “surplus” in section 28 carries the same meaning as the surplus referred to in section 26, and that the High Court erred in giving the term an expanded meaning. The Court accepted this submission. The Court noted that the term “surplus” has a technical meaning derived from the Insurance Act, which applies for valuation purposes under section 43 of the Life Insurance Corporation Act read with Notification G.S.R. 734 dated 23 August 1958, and that this meaning is evident from section 26. The two sections are closely linked. Accordingly, the surplus identified by an actuarial investigation must be dealt with by allocating at least ninety‑five per cent to the policy‑holders, while the balance may be used for purposes and in a manner that the Central Government may determine. The Court was informed at the hearing that no specific direction from the Central Government mandated the disposal of the entire balance. If no such direction exists, the surplus remains available for payment of deposits, subject to the existence of surplus. The Court was also told that the Corporation purportedly hands over its balance to the Central Government; counsel for the Government pointed out that the Act does not permit such a transfer, and the Court fully agreed. Even if the balance were handed over, ownership would continue to vest in the Corporation. When making any directions, the Government must consider the Corporation’s liabilities under section 9 of the Act, as emphasized by counsel for the Government.

The Court naturally apprehended that, if the Government were to issue orders directing the use of the entire amount and thereby leave no balance to satisfy the obligations imposed by section 9 of the Act, the provision of section 28 could be challenged as unconstitutional; the Court found that apprehension to be well‑founded. However, that difficulty did not arise because the Court agreed that the latter part of section 28 did not contain any mandatory language obliging the Government to order the utilisation of the whole balance in a manner that would defeat legitimate claims under section 9. In fact, the wording of section 9 is so compelling that the discretionary character of section 28, at least as it relates to the Central Government, must be understood as being subject to the imperatives of section 9. Consequently, the two provisions must be read harmoniously, and it could not have been intended that section 28 be employed to negate the explicit provisions of section 9. On this harmonious construction, the Court held that section 28 does not create any obstacle to the Corporation in fulfilling its obligations arising under section 9. The Court was inclined to adopt this interpretation because, as previously noted, a contrary view would render the latter part of section 28 ultra‑vires the Constitution by effectively removing property rights of other persons by a “side‑wind” method. Accordingly, the Court agreed with the conclusions reached by the High Court, albeit for different reasons. The appeal therefore failed and was dismissed with costs, and the appeal was dismissed.