2018 (2) TMI 1133 - AT - Companies Law

Scheme of the Insurance Act read with that of IRDA Act - appointment of Administrator to manage the affairs of the Insurer under the control of the IRDAI by invoking powers conferred upon it under provisions of Section 52 (A) of the Insurance Act, 1938 - transfer the insurance business of the Appellant to an outside insurer - Held that - The report and its outcome have potentially and adversely affected the appellant, therefore, the IRDAI must have supplied a copy of the report to the appellant before passing the impugned order dated July 28, 2017 seeking to transfer the insurance business of the Appellant to an outside insurer, namely ICICI Prudential Life Insurance Co. Ltd., to enable the appellant to make a representation on the Administrator s report in question. This action of the IRDAI is clearly in breach of the principles of natural justice. The same cannot be countenanced when we look at the larger scheme of the Insurance Act and the place the Respondent occupies in regulating the insurance business in the country. The impugned order dated July 28, 2017, therefore, deserves to be quashed and set aside and we order accordingly. In fact, it is not the case of the IRDAI that whenever an Administrator is appointed to manage the affair of an Insurance Company on account of certain alleged irregularities, transfer and merger of the said Insurer with another outside Insurer is the only consequence which shall invariably flow. IRDAI must apply the principles of proportionality before resorting to such extreme measures of transfer, merger or winding up of an insurance business altogether. The action must commensurate with the nature of the violation in a given case. IRDAI is obligated to look into as to whether the violation is technical, venial in nature or is a serious violation which would gravely jeopardize the interest of policyholders of the said Insurance Company. In the instant case, the order is passed mechanically rather than by due application of mind on the facts and circumstances of the case, including the overall scheme of the Insurance Act read with that of IRDA Act. While upholding the appointment of the Administrator and the consequential order we hereby quash the impugned order impugned and restore the whole matter to the file of the IRDAI with a direction to proceed from the stage of seeking a representation/response from the Appellant on the Administrator s report in question as well as providing opportunity of being heard to the Appellant in consonance with the principles of natural justice. During the fresh hearing to be offered by the IRDAI to the appellant under this order, any of the parties, if it wishes to produce some documents or summon it from the other party, the said request shall also be considered as per law by affording an opportunity in this regard. IRDAI shall make an endeavor to complete the above said process as per law preferably within a period of three months from the date of receipt of the appellant s reply/response to the Administrator s report in question as per law and after giving opportunity of hearing to the Appellant.

Summary

Issues Involved:
1. Appointment of an Administrator by IRDAI.
2. Direction to cease underwriting new business.
3. Transfer of insurance business to an external entity.

Detailed Analysis:

1. Appointment of an Administrator by IRDAI:

The appellant, Sahara India Life Insurance Company Limited, challenged the IRDAI's appointment of an Administrator on June 12, 2017, under Section 52A of the Insurance Act, 1938. The IRDAI justified this action by asserting that it was necessary to protect policyholders' interests due to the appellant's inadequate responses to regulatory queries and potential financial irregularities. Despite the appellant's argument that the appointment violated principles of natural justice, the Tribunal upheld the appointment, noting that the appellant was given an opportunity to be heard, albeit limited. The Tribunal emphasized that the appointment of an Administrator is a temporary measure aimed at safeguarding policyholders' interests and ensuring proper management of the insurer's affairs.

2. Direction to Cease Underwriting New Business:

Following the appointment of the Administrator, IRDAI issued an order on June 23, 2017, directing the appellant to stop underwriting new business. This directive was based on the Administrator's report, which highlighted concerns about the appellant's financial health and management practices. The Tribunal noted that while the report was not initially shared with the appellant, this did not invalidate the order. The cessation of new business was deemed necessary to allow the Administrator to focus on rectifying existing issues without further complicating the insurer's operations. The Tribunal found this action to be within IRDAI's regulatory authority and in line with the objective of protecting policyholders.

3. Transfer of Insurance Business to an External Entity:

The most contentious issue was IRDAI's order dated July 28, 2017, which mandated the transfer of the appellant's insurance business to ICICI Prudential Life Insurance Company Limited. The appellant argued that this drastic measure was taken without providing a copy of the Administrator's report or an opportunity to respond, thus violating principles of natural justice. The Tribunal agreed with the appellant, stating that such a significant action required a thorough and fair process, including the opportunity for the appellant to make representations against the findings in the Administrator's report. The Tribunal quashed the order, directing IRDAI to provide the appellant with the report and a chance to be heard before making any final decision on the transfer of business.

Conclusion:

The Tribunal upheld the appointment of the Administrator and the directive to cease underwriting new business but quashed the order transferring the appellant's business to an external entity. It emphasized the need for IRDAI to follow principles of natural justice and proportionality in its regulatory actions. The case was remitted to IRDAI for reconsideration, ensuring that the appellant is given a fair opportunity to respond to the Administrator's findings.