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TMI Blog2018 (2) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce regarding the appointment of an Administrator by the Respondents vide order dated June 12, 2017 and the consequential order dated June 23, 2017 for not undertaking new business by the Appellate so as to facilitate the Administrator to manage the existing insurance work without causing any prejudice to the policyholders already on record of the Appellant. The case of the Appellant, in nutshell, is that such a unilateral and drastic action of Respondent as contained in the impugned order dated July 28, 2017 is in gross violation of the principles of natural justice and the various provisions of the Insurance Act, 1938 read with that of IRDA Act, 1999. 2. Appeal No. 6/2017 has been preferred against appointment of the Administrator by the impugned order dated June 12, 2017. This order has been passed by the IRDAI invoking powers under Section 52A of the Insurance Act, 1938. 3. Appeal No. 5/2017 has been preferred by the Appellant impugning the consequential order dated June 23, 2017 passed by the IRDAI in terms of the provisions of Section 52B read with Section 52B(3) of the Insurance Act, 1938. 4. Appeal No. 4/2017 has been moved by the Appellant to challenge the order d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IRDAI did not get the additional reply from the Appellant as undertaken, therefore, it issued a show cause notice (for short SCN ) dated March 09, 2017 calling upon the Appellant to show cause as to why appropriate proceedings should not be initiated against the Appellant under the Insurance Act, 1938 for not responding to the queries raised by it. Further, by letter dated June 09, 2017 the appellant was called upon to appear on June 10, 2017 (Saturday) to make its submissions on the queries raised by the IRDAI. The relevant portion of the said letter is reproduced herein below : 2. In view of the long and continuous silence for more than a year regarding our queries relating to the crucial financial aspects of the insurer as highlighted in the aforementioned letters coupled with the serious nature of the queries, you are advised to show cause (i) Why the Authority should not come to the conclusion that the financial position of the insurer does not reflect a true and fair view and therefore, the Sahara India Life Insurance Co. Ltd., is carrying on life insurance business in a manner likely to be prejudicial to the interest of holders of life insurance policies; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Administrator by order dated June 12, 2017 itself by the IRDAI. 12. At this stage, it is also noted that the IRDAI had already held a meeting on March 08, 2017 with one Mr. Pravin Kumar Jabade, Partner, T.R. Chadha Co., LLP, regarding investigation to be carried into the affairs of the appellant company by chartered accountants under Section 33 of the Insurance Act, 1938. In fact, the said chartered accountant company was appointed as Investigating Authority by the IRDAI vide order dated March 14, 2017 to conduct investigation into the affairs of the appellant and to submit a report under Section 33 (2) of the Insurance Act, 1938 for the F.Y. 2015-16 and F.Y. 2016-2017. Surprisingly, leaving aside the inspection of the financial statement pertaining to F.Y. 2014-2015, which had, in fact, been the concern of IRDAI hitherto before. The Investigating Authority, headed by an independent professional viz. a chartered accountant company, seems to have submitted his Preliminary Report on/or before May 31, 2017. Final Investigation report is stated to have been submitted by the Investigating Authority on June 09, 2017. A copy of this Investigation Report was not supplied to the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. M/s. Sahara India Life Insurance Co. Ltd., shall arrange to host this Order on their website prominently and also arrange to paste a copy of the operative portion of this order in a conspicuous place at each of its branches and offices and the offices of its corporate agents and any other intermediaries immediately. 14. Not being satisfied with the appointment of Administrator to manage the affairs of the Appellant company as well as initiating of investigation into the affairs of the Appellant company through Chartered Accountants, the IRDAI resorted to an extreme measure of ordering the merger of the Appellant Company with an outside company, namely ICICI Prudential Life Insurance Company Limited by the third impugned order dated July 28, 2017. Thus, the show cause notice dated March 09, 2017 culminated into three impugned orders dated June 12, 2017, June 23, 2017 and July 28, 2017. Vide the impugned order dated July 28, 2017 the appellant company was directed not to carry on life insurance business after the appointed date and was directed to surrender its Certificate of Registration No. 127 dated 6th February, 2004 to the Insurance Authority within 15 days of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ₹ 1202 Crore controlled fund as against the policy holders liability of ₹ 922 crores. 17. The Appellant submits that the undue haste with which the Administrator was appointed clearly shows that none of the explanations provided by the appellant at the farcical personal hearing on 12.06.2017 were properly considered and that Respondent No. 1 had already predetermined the issues and made up its mind on the course of action to be followed by the Respondent with respect to the Appellant. The Administrator submitted his report to Respondent No. 1 on June 22, 2017 without supplying a copy of the same to the appellant. The appellant submits that based on the report of the Administrator, the respondent no. 1 has passed two subsequent impugned orders dated June 23, 2017 and July 28, 2017 in gross violation of the principles of natural justice. 18. Respondents No. 1 and 2 have filed their reply. The respondents in their reply submit that as a Regulator, the Respondent No. 1 has to perform two-fold role one as market conduct regulator that would punish misconduct through enforcement action and, another, as a prudential regulator , whose prime task is to ensure that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d entity purely for expansion of the appellant s insurance business at an All India level pursuant to the decision of the Board of Directors of the Appellant. On a query raised by the respondent, on the advance of security deposit of about ₹ 78 crores to Sahara India, the appellant replied on March 17, 2015 by email and explained its position which was further reiterated on certain occasions, including a detailed letter submitted by the appellant to the IRDAI on July 11, 2017. The appellant consistently submitted before the Respondent that the said interest free deposit would result in significant savings to the Appellant company and simultaneously enable it to achieve the desired growth at PAN India level. It is also argued by the appellant before us that the decision was not only in the interest of the Insurer company but also in the larger commercial interest of the policyholders as well. Moreover, as per the appellant, this deposit does not qualify as investment in a group company or immoveable property or real estate. Without prejudice, the appellant submits that it did take up the issue with M/s. Sahara India, which initially declined to pay interest on the security dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied its mind to the legal basis to make such observations along with many other directions passed in the order dated July 28, 2017. 22. We have heard the Learned Sr. Counsel, Shri Gaurav Joshi for the appellant and Learned Counsel Shri Somasekhar Sundaresan, for the respondents at length and have also perused the pleadings and documents, produced before us at the time of hearing. 23. It is true that various powers have been conferred upon the IRDAI to be adopted suitably for violation of the prescribed rules and norms against an errant Insurer depending upon a fact situation of a given case. The IRDAI derives its authority from the Insurance Act, 1938, as amended from time to time, and, therefore, it is important to briefly analyze the scheme of the said Act along with the IRDA Act, 1999 and the place the IRDAI occupies therein to regulate the Insurers and certain connected entities. Section 4 of the IRDA Act, 1999 provides for its composition as consisting of one Chairperson, not more than five whole-time members and not more than four part-time members to be appointed by the Central Government from amongst persons of ability, integrity and standing, who have knowledge o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Civil Court of original jurisdiction in a district and includes the High Court in exercise of its ordinary original civil jurisdiction. The definition of court is slightly relevant inasmuch as the Insurance Act excludes jurisdiction of Civil Court in certain matters and confers it upon this Tribunal, i.e., Securities Appellate Tribunal and/or National Company Law Tribunal or National Company Law Appellate Tribunal, as the case may be. Section 2(7-A) defines Indian Insurance Company as one which is limited by shares and is formed and registered under the Companies Act, 2013 or has been converted into such a company within one year of the amended Insurance Act, 2015, which came into existence w.e.f. December 26, 2014. Section 2(9) again defines Insurer as an Indian Insurance Company or a Statutory body established by an Act of Parliament to carry on insurance business and includes a foreign company engaged in re-insurance business through a branch established in India. Section 2(11) defines life insurance business , inter alia, as business of effecting contracts of insurance upon human life, etc. 25. Section 3 is important as it deals with the registration of a person/compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurance, it has to maintain a separate fund to be called the Life Insurance Fund and its assets are to be kept separate from other assets of the Insurance Company. In fact, the Life Insurance Fund is treated as absolutely the security of the life insurance policyholders even if it belongs to the Insurer Company, which might be simultaneously carrying on businesses other than the life insurance business. The underlying idea in establishing and maintaining a separate insurance fund seems to be a beneficial measure, exclusively meant to protect the policyholders in case the Insurer company, due to any reason, goes into liquidation, winding up or is faced with any such other distressing eventuality. 28. Sections 11 to 13 deal with maintenance of accounts and balance sheet, audit and actuarial report by the Insurer. Section 14 deals with maintenance of policies and claims by an Insurer, whereas, Section 15 requires submission of returns, i.e., audited accounts and statements referred to in Sections 11 to 13 of the Act. Similarly, Section 18 requires furnishing of every such report to the IRDAI which concerns the affairs of the Insurer and which might have been submitted to the mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires an Insurer to submit to the IRDAI the returns giving details of any investment which might have been made by the Insurer. 31. Section 29 prohibits the Insurer from giving any loan either on hypothecation of property or on personal security, except loan on insurance policy issued by it, that too, within their surrender value, to any Director, Manager, Actuary, etc. This is also a beneficial measure meant to protect the interest of the policyholders and it puts a check on the insurer to transfer or divert funds in any manner to its close associates, as mentioned in the said section. 32. The next important provision in the Insurance Act relates to investigation and is to be found in Section 33 which provides that IRDAI may, if it considers expedient to do so, by order in writing, direct any person to investigate the affairs of the Insurer and to report to the Authority accordingly. The person so appointed is to be designated as Investigating Officer . However, it is unclear as to who can be appointed as an Investigating Officer, whether from within the IRDAI or an outsider. Be that as it may, on completion of the said investigation, i.e., after inspecting the records a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s enshrined in Sections 35 to 37. Section 35 of the Insurance Act, 1938 lays down the process that is required to be followed for transfer of an insurance business from one insurer to another and consequent amalgamation or merger of the former with the latter. It states that an insurance business may only be transferred to or amalgamated with the business of another insurer, if a scheme prepared under this section is approved by IRDAI. It further states that notices of the intention to amalgamate or transfer the said business, along with a statement of the nature of amalgamation or transfer and reasons to do so, must be provided to IRDAI at least 2 months before the application is made. Copies of these documents, which include, inter alia, a draft of the agreement or deed under which it is proposed to effect the amalgamation or transfer; balance sheets in respect of the insurance business of each of the insurers concerned in such amalgamation or transfer, will remain open for inspection by members and policyholders at the principal and branch offices and chief agencies of the insurers concerned. These documents should bear the same date on which the amalgamation or transfer is to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt not to be a Director in the Insurance Company and some other similar issues are also dealt with. Section 52, however, puts prohibition on carrying on business on dividing principle by the insurance company. 37. Next, we come to an important provision which is relevant for the purposes of these appeals and it is Section 52-A. It deals with the powers of the IRDAI to appoint an Administrator. The very subject reads as When Administrator for management of insurance business may be appointed. As per Section 52-A, it is only when the IRDAI has reason to believe that an Insurer s acts are likely to be prejudicial to the policyholders that the IRDAI is empowered to appoint an Administrator for the purposes of managing the affairs of the Insurer under the direction and control of the Authority. The IRDAI, however, can appoint an Administrator as per the provisions of Section 52A only if such an appointment of Administrator is going to be more advantageous to the general interest of policyholders. 38. Section 52B prescribes the powers and duties of an Administrator and lays down that the Administrator shall manage the business of the Insurer with greatest economy compatible with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in court to observe the court s proceedings and follow the Tribunal s direction, including oral direction as regards the submission of records, etc. 40. Section 52BB simply deals with the Power of the Administrator respecting property liable to attachment under Section 106; and Section 52-C provides for cancellation of contracts and agreements. Section 52-D specifically mentions that the Administrator can be divested of the management of the insurance business at any time if the IRDAI feels that the purpose of appointing the Administrator has been achieved. The Administrator can be removed by the IRDAI for any other reason also. Section 52-E, however, talks of the finality of the decision in appointing an Administrator by excluding the jurisdiction of any court . As has been already noted hereinabove, Section 2(6) of the Insurance Act specifically defines the Court as the Principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction. It is, therefore, evident that this Tribunal s jurisdiction to adjudicate the legality or otherwise of the order of appointment of an Administrator by the IRDAI i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report, etc. to the Authority and has not complied with its direction in certain matters. Such a person can be proceeded against in accordance with law and regulations framed in that behalf. A penalty of Rs. One lakh for each day, till such failure continues could be imposed and the outer limit of the penalty is Rs. One Crore. It is, therefore, abundantly clear that IRDAI is duly and particularly empowered to deal with defaulters who do not submit document, statement, return, reports, etc. and fail to comply with its direction. Here once again the object of the penalty is to bring the culprit to justice. 44. Section 110 deals with appeals to the Securities Appellate Tribunal and provides that if any person is aggrieved (a) by an order of the Authority made on and after the commencement of the Insurance Laws (Amendment) Act, 2015, or under this Act, the rules and regulations made thereunder; or (b) by an order made by an Authority by way of adjudication under this Act, may prefer an appeal to the Securities Appellate Tribunal having jurisdiction in the matter. Section 110(3) empowers the Securities Appellate Tribunal, after giving an opportunity of being heard to the parties t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, the IRDAI is required to follow its own regulations of 2016 and cannot automatically apply extra legal norms. 46. Before we deal with the legality of the appointment of the Administrator in the present case vide order dated June 12, 2017, read with the consequential order dated June 23, 2017 it would be appropriate to deal with the preliminary objections raised by the Respondent as to the very maintainability of the appeal in this regard. The respondent submits that, on appointment of the Administrator, he enters into the shoes of the Insurer and, as such, the Insurer company cannot challenge the very appointment of the Administrator. It is only after the job of the Administrator is over that the Administrator would be either terminated and the management of the Insurer business would again vest in the Insurer or alternatively the same be given to other Insurers in view of the amended provisions of Section 52 D of the Act. 47. This argument as to the maintainability is untenable inasmuch as the very idea of the appointment of the Administrator, as reflected in Section 52A and connected provisions thereof, carries with it serious consequences for the insurer company, alth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A Act. Therefore, the argument of the respondents in this regard has to be repelled at the outset. In this connection, we may pertinently refer to the judgment of the Hon ble Chancery Division of the United Kingdom in the case of Closegate Hotel Development (Durham) Ltd. Anr. Vs. Mclean Ors. Reported in 2013 EWHC 3237 (Ch). Paragraphs 5, 6 and 7 of the said judgment are relevant and are reproduced herein below for the sake of convenience :- 5. The basis for Mr. Trace s first argument was paragraph 64 of Schedule B1 to the 1986 Act which provides that an officer of a company in administration may not exercise a management power without the consent of the administrator. management power is defined as a power which could be exercised so as to interfere with the exercise of administrator s powers. Mr. Trace submitted that causing the companies to challenge the appointment of the administrators necessarily interfered with the exercise of the administrators powers. 6. I do not accept the submission. On the basic point of construction of schedule B1, in common with Lord Glennie in the Scottish case of In re Stephen, Petitioner [2012 BCC 537, I think that the concept of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed to challenge the validity of such an appointment of administrator. On a minute perusal of the paragraphs of the judgement in Closegate Hotel reproduced hereinabove, it emerges that the fact of a company going into administration per se does not put a complete end to the existence of the management of the company concerned. Certain residuary powers in the hands of the management empower it to undertake such acts as are necessary to ensure the company s survival. It is our considered opinion that an Insurer company whose affairs are being put under the supervision of an administrator cannot be left without a remedy, for to leave it so would be iniquitous. 50. Having rejected the preliminary argument of the Respondent as to the maintainability of the appeal, it would be advisable to analyze the provisions of Sections 52A and 52B in little detail for deciding the question of tenability of the appointment of the administrator and his powers and duties, etc. As noted hereinabove, Section 52A empowers the Authority to appoint an Administrator for the management of the insurance business if it has reason to believe that an Insurer is not acting in a manner which is beneficial to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated November 26, 2015. The clarification furnished by the Appellant vide letter dated March 29, 2016 was not fully satisfactory and the IRDAI called for additional reply, as according to it, the reply submitted by the appellant was inadequate. Thereafter, the IRDAI, vide SCN dated March 09, 2017, called upon the appellant to show cause as to why appropriate proceedings should not be initiated against the appellant under the Insurance Act, 1938 for not responding to the queries raised by the Authority. Surprisingly, there is no mention of any provisions of the Insurance Act, 1938 under which the SCN dated March 09, 2017 has been issued or the precise nature of violation or the nature of the proceedings to be followed in case the reply to the SCN was found to be unsatisfactory by the IRDAI. The cursory SCN seems to have been issued in a casual manner with the subject Non-receipt of response to subsequent queries on Annual Report Analysis for the financial year 2014-2015 Notice to show cause. After providing a small background to the matter, the SCN proceeds to add at para 4 that In view of the above, you are advised to show cause as to why appropriate proceedings should no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorized representatives of the Appellant by the Member (Life), followed by the Chairman endorsing the Member s proposal is technically not incorrect and irregular in the facts and circumstances of the case. Moreover, the appointment of an Administrator is purely a temporary measure by the IRDAI, primarily to bring the affairs of the Insurer back on the right track and thereby protect the interests of the policyholders. 56. There is no gainsaying the fact that right to be heard is one of the most important principles of natural justice as is universally accepted. The Hon ble Supreme Court in a catena of cases, beginning from State of Orissa Vs. Dr. (Miss.) Binapani Dei [AIR 1967 SC 1269] and A. I. Kraipak Vs. Union of India [AIR 1970 SC 150] has consistently held that the aim of exercise of administrative or quasi judicial power is to arrive at a just decision by acting fairly. Fair play in action is also treated as an important ingredient of the principles of natural justice. At the same time, it has also been held by the Hon ble Supreme Court that the standard of natural justice may vary with situations contracting into a brief and minimal natural justice. Sometimes, the bar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ministrative system to deal with cases pertaining to insurance companies violating the law. As already stated hereinabove, since the appellant was given the opportunity sought for, however limited, and the hearing was adjourned from June 10, 2017 to June 12, 2017, we do not see any reason to upset the appointment of the Administrator, particularly in the case in hand. The appointment of the Administrator is hereby upheld and Appeal No. 6/2017 is accordingly dismissed. 59. In this context, we may consider another issue raised by the appellant regarding the authority of the Chairman to issue the impugned order dated June 12, 2017 and consequential order dated June 23, 2017 without hearing the Appellant. During the course of hearing it was brought to our notice that the Member (Life), Shri Nilesh Sathe, heard the appellant s representatives on June 12, 2017 and thereafter the minutes were put up before the Chairman on the same day and he agreed with the proposal to appoint an Administrator. Accordingly, the impugned order of appointment of the Administrator on June 12, 2017 itself was issued. As far as this argument of the Appellant goes, it is legally the duty of the Authority to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany and the IRDAI agrees to give it to some other Insurer that the question of compliance with principles of natural justice would arise. In this context, the respondent IRDAI has also relied on Hon ble Supreme Court s judgement in the matter of Innoventive Industries Limited Vs. ICICI Bank Anr. (Civil Appeal Nos. 8337-8338 of 2017 decided on August 31, 2017) also reported in 2017 SCC Online SC 1025. We find it difficult to accept this argument. The Hon ble Apex Court s judgment in Innoventive Industries Limited (supra) interprets the provisions of the Insolvency and Bankruptcy Code, 2016 ( Insolvency Code for short). The scheme laid down in the Insolvency Code is different from the scheme of prudential regulation provided under the Insurance Act, 1938, which is evident from the fact that the non-obstante clause is explicitly provided in the Insolvency Code whereas the same is absent in the Insurance Act, 1938. Moreover, sub-section 52(B)(1)(b) specifically provides in the Insurance Act, 1938 that four options are available to the Administrator for recommendation to the IRDAI and one of them is specifically about the the carrying on of its business by the insurer (whether wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Insurance Authority had acted in passing the impugned order dated June 23, 2017, is surprisingly not even mentioned in the impugned order dated June 23, 2017, whereby the appellant was directed not to procure/collect proposals deposits/underwrite new business, with immediate effect, i.e., close of business on 23rd June, 2017 itself. Although the non supply of Administrator s report to the Appellant before passing impugned order dated June 23, 2017 is a matter of serious concern, it may not be considered highly fatal and irregular so as to vitiate the very appointment of the Administrator and his further actions in the facts and circumstances of the present case. But, we are of the considered opinion that this report of the Administrator, which has now been produced before us, should have at least been supplied to the Appellant before passing the impugned order dated July 28, 2017. As hereinabove noted, the impugned order dated June 23, 2017 is only a consequential order which enables the Administrator to concentrate more on the existing affairs of the Insurer company and to bring them on the right tract by various methods prescribed in law and not to involve in procurement of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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