9911796707
TMI Blog2018 (2) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... any Limited, has preferred three appeals against various orders passed by the Respondent No. 1, i.e., Insurance Regulatory and Development Authority of India [for short 'IRDAI'/ 'Insurance Authority'] and actions taken by it pursuant to those orders, particularly order dated July 28, 2017 by which IRDAI directed the insurance business of the Appellant to be altogether transferred to an entirely different and outside company, namely - ICICI Prudential Life Insurance Company Limited. The Appellant has also raised the grievance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, resigned from the company without giving any notice and without having filed any reply or taking appropriate action in response to the letter dated 18.05.2016. IRDAI sought further clarifications through reminders/letters dated September 26, 2016 and January 04, 2017 from the Appellant. The Appellant then acted upon the clarifications sought and communicated with the IRDAI on the phone and undertook to submit further response to the queries raised by the respondent. 8. However, for another two months the 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 relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the financial statement of the Appellant pertaining to the Financial Year 2014-2015, the IRDAI jumped to the conclusion that the affairs of the appellant were allegedly not in order and then appointed an 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. Mr. R. K. Sharma, who presented the articles of charge on behalf of the IRDAI, was appointed as the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of this order. M/s. Sahara India Life Insurance Co. Ltd., is however, directed to i. Continue to collect and account for the Renewal Premium; and ii. Service the existing business and policy holders, unhindered. 4. In terms of Section 52 B(3) of the Insurance Act, 1938, this order is binding on all persons concerned, and shall have effect notwithstanding anything in the memorandum or articles of association of M/s. Sahara India Life Insurance Co. Ltd. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... av Joshi, for the Appellants, submits that the business of the Appellant Company has constantly reported a profit in every financial year since 2010 onwards, based on which the Appellant has been declaring even bonus to its policy holders from time to time. The Appellant submits that on the very date of passing of the impugned order the total amount of directed securities is much more than the requisite liability qua the policy holders, i.e., of about Rs. 1202 Crore controlled fund as against the policy holders' liability of Rs. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the respondents have failed to point out any instance wherein the funds of the policyholders were ever placed at risk by the Appellant. As regards respondents' contention in respect of security deposit paid by the Appellant to Sahara India, the Appellant submits that the security deposits were paid for premises which were previously taken and additional premises which were to be taken on leave or license basis from the said 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not 'fit and proper'. On the contrary, this Tribunal has consistently taken a view that an order passed by one regulatory authority would normally bind the entities controlled by that authority alone and no other regulatory authorities. The Ld. Senior Counsel fairly submits that it is open to the Regulatory Authority to frame regulations to apply orders passed by any other Regulator to the extent it deems fit. IRDAI has not 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined in clause (a) of sub-section (1) of Section 2 of the Actuaries Act, 2006; Section 2(1-A) defines "Authority" as the Insurance Regulatory and Development Authority of India as constituted under Section 3(1) of the IRDA Act; Section 2(2) defines "policy-holder" as a person to whom the whole of the interest of the policy-holder in the policy is assigned once and for all; Section 2(6) defines "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. 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 India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation with respect to an insurance company but also with the methodologies to be followed by the IRDAI in case it proposes to suspend, cancel or stop an Insurer from carrying on any further business. 27. Section 10 provides for situations in which an Insurer may be engaged in different types of insurance like life, marine or other miscellaneous insurance business. If the Insurer carries on the business of life insurance, 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of Section 27-C, not more than 5% in aggregate of the controlled fund or assets as provided in Section 27(2) in respect of the companies belonging to the promoters. Thus, the permissible limit of investment by the Insurer in the companies which may belong to the Promoters of the insurance company, is limited to 5% only and subject to conditions as may be imposed by the IRDAI. Section 28 also 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, etc. It can also remove managerial persons from office. The IRDAI is also vested with the power to appoint Additional Directors on the Board of the Insurance Company, if it deems fit. Certain other powers, such as ones mentioned herein, are also conferred upon the IRDAI by provisions of Section 34. 34. Next, we come to an equally important aspect of amalgamation and transfer of business, which is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f insurance policies, nomination by policyholders, prohibition of payment by way of commission or otherwise for procuring business, limitation of expenses of management in life insurance business, general insurance, health insurance and reinsurance; prohibition of rebates; appointment of insurance agents, their qualifications and their regulations as intermediaries by the IRDAI; an Insurance Agent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appoint an Administrator for the appellant company while an investigation by an independent Investigating Authority was still on-going under Section 33 of the Insurance Act, at the instance of the IRDAI itself. Nevertheless, we shall decide the appeals on the basis of the pleadings and records made available. The IRDAI should be more vigilant in future by deputing more responsible officers 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 here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness situated in India or outside India, except in the manner specified in the regulations. 43. Part-V of the Insurance Act provides in Section 102 the penalty for default in complying with or act in contravention of this Act. It is pertinently noted that the IRDAI is authorized to deal with a person who has allegedly not furnished a certain document, statement, account, return, 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 Insuranc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulatory and Development Authority of India (Registration of Indian Insurance Companies)(Seventh Amendment) Regulations, 2016. These regulations have been framed by IRDAI deriving powers from Sections 3, 3A, 114A of the Insurance Act, 1938 read with Section 26 of the IRDA Act, 1999, in consultation with the Insurance Advisory Committee. Therefore, before passing such drastic orders, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 'IRP') under Section 17 of the Code, the management of the affairs of the corporate debtor fully vests in the said IRP. The law itself provides in the case of Insolvency and Bankruptcy code that the powers of the Board or the partners of the corporate debtor shall stand suspended and be exercised by the IRP. Such provisions are conspicuously absent in the Insurance/IRDA 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid right, the Learned Judge further opined, is in the same vein as the right to oppose a petition or the right to appeal a winding up order once made. The Ld. Judge further stated that it would be nonsensical if a company is allowed to oppose an application for the appointment of an administrator made by a charge holder or other creditor, and yet is not allowed 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t merely two days' time to prepare its reply. After completing the formality of hearing, the respondent hastened to appoint the Administrator on the very same day. 52. It is a matter of record that IRDAI had initially sought certain clarifications/comments on the review/performance of the appellant in respect of the financial year 2014-2015 vide letter 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 issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o contend that it was not given an opportunity of hearing. We, thus, note that the appointment of Administrator was not in violation of the principles of natural justice, as contended by the Appellant. Since the order appointing an Administrator is more in the nature of an administrative order, the opportunity which was given by the IRDAI to the 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Administrator on technical grounds, it would lead to serious consequences inasmuch as the report of the Administrator itself would have to be declared a nullity, which we are reluctant to do. Such a drastic step on our part would create further chaos in the regulatory system, which is itself trying to evolve a workable and mature administrative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his behalf. It is pertinent to note that in case the Administrator's advice is to vest the business in the Insurer company itself, the dispute with regard to the compliance of natural justice may not occur. However, it is only when the Administrator recommends amalgamation of the present business of the Insurer company with an alien company 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 Inso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IRDAI, proceeded to issue the impugned order dated June 23, 2017 directing the appellant "not to procure/collect proposal deposits/underwrite new business with immediate effect, i.e., close of business on 23rd June, 2017" without supplying a copy of the Administrator's report to the Appellant. The Administrator's report, on which 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 impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated June 23, 2017 impugned in Appeal 5/2017, we hereby quash the impugned order dated July 28, 2017 impugned in Appeal 4/2017 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. 65. Thus, Appeal No. 4/2017 stands allowed in terms of the above directions while Appeal No. 6/2017 along with Appeal No. 5/2017 stand dismissed with no order as to cost. Accordingly, Miscella ..... X X X X Extracts X X X X X X X X Extracts X X X X
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