Sarjoo Prosad, C. J.
1. The Official Liquidator has preferred this appeal against the decision of Sharma J. dated 27-11-1957, sitting single, dismissing his application under Section 106 of the Insurance Act (Act No. IV of 1938).
2. The Karachi Mutual Assurance Company Ltd. is a Life Insurance Company originally incorporated and registered with the Registrar of Joint Stock Companies at Karachi in 1945. In March, 1946, the Company secured registration certificate from the Controller of Insurance in order to carry on its business in life insurance. Soon after the partition of India, on account of which Karachi fell in West Pakistan, the Company had to transfer its Head Office to Ajmer in November, 1947.
In 1949 it appears that the Company being in sore need of funds in order to make deposit of Government security as required under Section 98 of the Insurance Act, borrowed a loan of Rs. 10,000/- from the Rehabilitation Finance Administration of the Government, and the money was advanced to the Insurance Company under the provisions of the Rehabilitation Finance Administration Act, 1948 (Act No. XII of 1948). On obtaining the loan, the Directors of the Company deposited the amount in the Reserve Bank of India under Section 98(2) of the Insurance Act. Later, however, it appears that they were unable to make the required deposit under Section 98, and the Controller of Insurance on 31-3-1951, cancelled the registration certificate issued by him to the Company. The result was that the Company was unable to carry on its life insurance business thereafter.
The Company, therefore, went into liquidation. On an application filed by the Controller, an order for winding up of the Company was passed by the District Judge of Ajmer on 16-4-1955, and Shri J.B. Hingorani, line appellant, was appointed Official Liquidator. The loan of Rs. 10,000/-, which had been obtained by the Directors of the Company had to be paid back by the Official Liquidator out of the money deposited under Section 98(2) of the Insurance Act with the Reserve Bank of India. This was done with the concurrence of the Court.
The Official Liquidator then presented this application under Section 106 of the Insurance Act praying that the Directors of the Company should be directed to make good the amount. He submits that it was due to their conduct that the assets of the Company had been proportionately diminished, and the loan had been taken in violation of the provisions of Section 8 of the Insurance Act.
The case substantially made out in the petition is that the Board of Directors being fully aware that no charge could be created by them on the assets of the Company as such have diminished the Insurance Fund of the Company to the detriment of the policy holders, and are, therefore, personally liable to reimburse the Company to the sum of Rs. 10,000/-. He presented the application after obtaining sanction of the Attorney General of India, and then on integration of the State of Ajmer with Rajas than, of the Advocate General of Rajasthan.
3. Respondents Nos. 1 and 2, the Directors, have resisted the claim of the Official Liquidator. They admitted that the Company was a Mutual Assurance Company, of which they were Directors, but they alleged that since 9-1-1951, they had ceased to be Directors of the Company. They submitted that the amount in question had been borrowed in order to enable them to make the necessary deposit under Section 98 of the Insurance Act. which amount they could not deposit without taking such a loan, as the Company had suffered financial set back due to the partition of India. They pleaded that it became necessary for them to obtain the loan from the Rehabilitation Finance Administration, as they needed money for making the deposit with the Reserve Bank of India in order to carry on the business of life insurance.
They further pleaded that they had not created any charge in contravention of any provision of the Insurance Act so as to diminish wrongfully the assets of the Company; but that it was by operation of S, 13 of the Rehabilitation Finance Administration Act itself that a charge had been created in respect of the loan advanced by the Government.
4. The learned Single Judge of this Court, after a careful examination of the matter held that it was necessary for the Directors in order to comply with the provisions of Section 98 of the Insurance Act, to take the loan required from the Government, and deposit the same for the purpose of carrying on the business of the Company. He also found that it had not been shown that it was possible for the Company which was a displaced person to obtain a loan otherwise than under Act No. XII of 1948. By obtaining the loan the fund of the Life Insurance Company had been augmented to that extent, and that amount, which was taken as a loan, had to be paid back to the Government.
It had to be paid back out of the Insurance Fund because a charge was created by operation of Section 13 of Act No. XII of 1948. It could not, therefore, be alleged that there was any act of mis-feasance, malfeasance or non-feasance on the part of the Directors, and that they had contravened any of the provisions of the Insurance Act, and caused a loss to the assets of the Company thereby. On these grounds the learned Judge rejected the application of the Official Liquidator, against which order this appeal has been presented.
5. A Question has arisen as to whether the appeal is maintainable. This is an order passed by the learned Single Judge of this Court in the exercise of his Original Jurisdiction, because by virtue of amendment of Section 106 of the Insurance Act, such an applica-catioii couid be entertained by this Court, and not by the learned District Judge. There can be no doubt that the application has been made in the course of liquidation proceedings, the Insurance Company being under liquidation. Under Section 110 of the Insurance Act, an order made in the course of winding up is appealable. The only question arises whether, therefore, an appeal would He to a Division Bench of this Court from an order passed by the Single Judge in the course of winding up proceedings. This is clearly answered by Section 18(1) of the Rajasthan High Court Ordinance. As such there could be no question as to the competence of the appeal.
6. Mr. Hingorani vehemently' contends that the order of the learned Judge of (his Court is incorrect, and that his application under Section 106 of the Insurance Act against the Directors should have been entertained. Section 106, inter alia, provides that the Liquidator of an insurance company may apply to the Court for appropriate action against any person or director of the insurance company on the ground that he has been guilty of any misfeasance or breach of trust in relation to the insurer, or that by reason of any contravention of the provisions of the Act, the amount of the life insurance fund has been diminished,
On such application being made, if the Court finds that a prima facie case has been made out against the delinquent, the Court may direct attachment of the property of the delinquent, and compel him to make good the loss suffered by the Company. Mr. Hingorani contends that in this case in caking the loan of Rs. 10,000/- from the Rehabilitation Finance Administration, the Board of Directors clearly infringed Section 8 of the Insurance Act. He points out that under the law the deposit made under Section 98 of the Act shall be deemed to be part of the assets of the insurer and shall not be susceptible of any assignment or charge; nor shall it be available for the discharge of any liability of the insurer other than the liabilities arising out of policies of insurance issued by the insurer, so long as any such liabilities remain undischarged.
According to the contention of Mr. Hingorani, the amount of Rs. 10,000/- which had been deposited under Section 98 of the Act could not be, therefore, susceptible of any assignment or charge, and the directors were guilty of infringing the provisions of the Insurance Act in acting in contravention when they borrowed this amount from the Rehabilitation Finance Administration for the purpose of making the deposit under Section 98 of the Insurance Act. We regret we are unable to appreciate this contention of the learned counsel. On the facts stated earlier, and as admitted in the petition of the Official Liquidator himself, the Company was in sore need of funds in order to make the necessary deposit under Section 98 of the Act, and it does not appear that the Directors could raise the money for making the deposit under Section 98 except by taking the loan from the Rehabilitation Finance Administration,
In raising that loan they did not act in contravention of Section 8 of the Insurance Act at all, and they deposited this amount with the Reserve Bank of India for the purpose of carrying on the life insurance business under Section 98(2) of the Act. It is submitted that by virtue of Section 13 of the Rehabilitation Finance Administration Act, there was a charge attached to the loan itself, and, therefore, it should not have been taken by the Directors at all. They having done so, the Directors themselves should be deemed to have created the charge, and thus infringed Section 8 of the Insurance Act. Section 13 of the RCT habilitation Finance Administration Act of course provides that the assets created from the loan shall, notwithstanding any law or usage to the contrary, be deemed to be mortgaged to the Administration for the repayment of the loan together with the interest thereon and the amount of the loan and the interest thereon shall be first charge on such assets.
This charge, therefore, which was created on the amount advanced under this Act was a charge created by law overriding the provisions of Section 8 of the Insurance Act, and it could not be said that the Directors by any act of their own created such a charge. The charge was created by operation of law and it was no fault of the Directors if Section 13 of the Rehabilitation Finance Administration Act had an overriding effect notwithstanding any law or usage to the contrary.
7. It is next contended that the Directors should not have taken any loan at all, and closed their business. The Directors may have in the circumstances considered it reasonable to make an attempt to keep the business alive as far as practicable, and for that purpose they felt it necessary to take the loan in question. The mere fact that they did so cannot be regarded as any act of misfeasance or malfeasance on their part so as to cause loss to the policy holders; nor can it be reasonably argued that there was any detriment or loss to the assets of the insurance company on account of this loan or the payment thereof.
This loan, which had been borrowed from Government, had to that extent undoubtedly augmented the assets of the Company, and had to be paid back to the Government out of those assets. The money was a loan and had not come out of the pockets of the policy holders. It cannot be, therefore, said that there was any detriment to the assets of the Insurance Company On account of any such payment.
In order to Succeed in an application tinder Section 106 of the Insurance Act it had to be proved not only that there was a contravention of the provisions of the Act; but also that by reason of such contravention the amount of the Life Insurance Fund had been diminished. None of these two factors have been established in the present case. In our opinion, no case of malfeasance or misfeasance has been made out at all in the circumstances alleged by the Liquidator.
8. It was also suggested that an examination of the Balance Sheet would show that the Company had been squandering the amount of premia which it obtained from the policy holders over unnecessary expenditure. In the petition itself no such allegation has been specifically made, and the Court was never invited to investigate about the Correctness or otherwise of the items of expenditure mentioned in the Balance Sheet. The Court was only invited to consider whether by incurring this loan which was eventually paid out by the Liquidator to the Government, and which in fact had been deposited in the Reserve Bank of India under Section 98 of the Insurance Act, the Directors had done anything to merit the penalty under Section 106 of the Insurance Act.
On that point we are perfectly satisfied that no case has been made out for compelling the Directors to pay back this amount to the Insurance Company. Sharma J. in dealing with this question about the alleged squandering of premia obtained from the policy holders observed that the Liquidator had not been able to satisfy that the Directors squandered away the money obtained from the policy holders. Every company had to meet certain contingent expenses in the inception of its career. In the case of this unfortunate Company the partition of India came soon after its incorporation and registration; and it was not surprising that under the circumstances it was faced with a crisis as admitted by the Liquidator himself and had to raise money for the purpose of making the deposit under Section 98 of the Act.
9. The appeal is, therefore, without any substance, and must be dismissed; but on the whole we think it would be better to let each party bear its own costs of this appeal.