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Hari Chandana Joga Deya Vs. Hindustan Co-operative Insurance Society, Ltd. - Court Judgment

LegalCrystal Citation
SubjectInsurance;Civil
CourtKolkata
Decided On
Judge
Reported in(1925)ILR52Cal239
AppellantHari Chandana Joga Deya
RespondentHindustan Co-operative Insurance Society, Ltd.
Cases ReferredLd. v. Llanelly Steel Co.
Excerpt:
life insurance - combined endowment policy of insurance--construction of such policy--alteration of articles of association, when permissible and when it causes breach of contract. - .....in respect of this policy, after paying up in full all calls due and payable in respect of the bond shares hereinafter mentioned.5. clause 3.-this policy is issued on the express condition and stipulation that in case the insured should outlive the endowment period all dividends to accrue become payable on the shares numbered...(described in the certificate thereof as bond shares) shall be subject during the period ending to a lien in favour of the society for payment of the premium payable on this policy to the total premium in each case being equal to the face value of the policy.6. condition 7 of the policy provides:7. profits apportioned by the society will in the first instance be applied to the payment of remaining calls on the bond shares relating to this policy up to and.....
Judgment:

Page J.

1. This is an action, brought to recover a sum of Rs. 20,000 as being the principal sum due under a policy of insurance. The policy is for Rs. 20,000, and the annual premium is Rs. 1,550. It is an Endowment Policy for 10 years; the Rs. 1,550 has been regularly and duly paid, and the 10 years have elapsed.

2. The defendant company in the first place urges that I ought to read together the proposal for the policy and the policy itself, because it is provided in the policy that the proposal together with the statements made in connection therewith to the Medical Officer is to be deemed to be the basis of the contract. The defendant company farther contends that if the proposal and the policy are read together the contract is not a contract merely for insurance, or indeed primarily for insurance, but is a contract in the first place to take shares in the Company, the annual sum of Rs. 1,000 being treated as in each year a call in respect of the shares, and, secondly, that it is a contract whereby if the policy-holder pays the annual sum agreed upon by the parties as and for excess premia (a term which I will explain later) at the end of 10 years, he shall receive Rs. 20,000 less any sum which may be due on calls which have been made and are unpaid and less any further sum which may be due on an actuarial basis as the balance of the premia in respect of the insurance over and above the excess premia which have been paid, which balance in the events that have happened the Company has been unable to recover out of dividends declared by the Company.

3. In order to solve this problem it is necessary to look at the terms of the policy itself. By Section 1 it is specifically provided as follows:

4. 1. 'The Society, hereby guarantees to the insured that if the insured pays to the Society at their office in Calcutta on the 7th day of April 1910 and in each succeeding year up to and including the year 1919 the sum of Rs. 1,550 or in lieu of any such annual payment the full number of instalments thereof as may be agreed upon (of which agreement the receipt granted by the Society shall be full and sufficient evidence) then the Society will on the 7th April 1920 (the period intervening between the last mentioned date and the Endowment period) pay to the insured the sum of Rs. 20,000 at the head office of the Society in Calcutta or at the insured's permanent residence whichever may be preferred and will also pay at the end of the endowment period such additional sums by way of profits as according to the Society's regulations may accrue and become payable in respect of this policy, after paying up in full all calls due and payable in respect of the Bond shares hereinafter mentioned.

5. Clause 3.-This policy is issued on the express condition and stipulation that in case the insured should outlive the endowment period all dividends to accrue become payable on the shares numbered...(described in the certificate thereof as bond shares) shall be subject during the period ending to a lien in favour of the Society for payment of the premium payable on this policy to the total premium in each case being equal to the face value of the policy.

6. Condition 7 of the policy provides:

7. Profits apportioned by the Society will in the first instance be applied to the payment of remaining calls on the Bond shares relating to this policy up to and including the 20th call or the last call made as the case may be and any surplus remaining thereafter at the end of the within mentioned period of lien may at the option of the insured be either (1) paid up in cash, or (2) applied in such other manner as he may direct.

8. Looking at the proposal I find that it is in this form

9. Dear Sir,

10. I am desirous of taking so many Bond shares in the capital of the abovenamed Society and shall forward Rs....being the first instalment of the first five per cent, call payable on application with a fee of Re. 1 for share certificate, etc., and I undertake to hold as many of these shares as may be allotted to me, subject to the provisions of the Memorandum and Articles of Association of the Society and the special conditions of such Bond shares combined with insurance benefits.

11. In case I fail to pay the first instalment aforesaid within a month from date of notice of acceptance of this proposal, I shall be liable to pay the incidental costs incurred by the Society in connection therewith.

12. Then there are set out certain details. Endorsed on the back of the proposal form are certain conditions:

1. Amount of Insurance is always equal to nominal value of the shares (hereinafter called Bond Shares) against which it is granted.

2. Ordinary Endowment period 25 years.

N.B.---The Endowment period may be varied on terms and conditions ascertainable on application.

3. Dividends on Bond shares payable as subject to a lien for payment of the premiums on the insurance granted against these shares which shall not exceed the face value of the policy in case of survival of the endowment period; but in case of previous death the period of lien to be extended to not more than five additional years.

N.B.---A single payment of Rs. 40 per share will be accepted in full discharge of 10 calls on Bond shares.

8. Bond shares may be redeemed (i.e., dividends thereon freed from above conditions) as under:

(a) At any time before payment of claim there-under if the insurance is lapsed or surrendered for cash or paid up value, or other security is offered and accepted for due payment of unpaid premiums at investment Insurance rates provided that such cash or paid up value has become due by reason of the dividends previously accrued.

(b) After payment of claim under the policy of the-remaining premium is secured as aforesaid of the present value thereof paid up in cash.

13. Pursuant to that proposal the plaintiff became a shareholder in the company, and a share certificate was-produced showing that he was a registered holder of 200 Bond shares of Rs. 100 each numbered consecutively 56616 to 56815. The certificate was dated 28th April 1910. On paying each year Rs. 1,000 plus Rs. 550 the plaintiff received certain receipts. This is the form of one of them:

Received the sum of Rs. 1,550 being the first 'yearly instalment of the first call of 200 Bond shares 'supplied by him...1910.

14. Later, it was slightly altered, and the form of receipt was:

Policy No. C5056, face value Rs. 20,000, the name, Rs. 1,000, premium Rs. 550. Total Rs. 1,550, 6th May 1918.

15. The plaintiff knew that the Rs. 1,550 which he was paying was as to Rs. 1,000, a call on the shares, and as to Rs. 550 excess premium on the policy. Now, the term 'excess premium' meant that while the Company in the case of policies for 25 years demanded no sum as payment for premium, in respect of policies payable in 10 years the Company demanded an annual premium of Rs. 550, and by Clause 3 of the Policy it was provided that the difference between the excess premium of Rs. 550 and the actuarial value of the full premium, (that is the full premium for Rs. 20,000 ascertained on an actuarial basis,) was to be received by the Company out of the dividends which the Company would pay up till the year 1935. Now, reading the policy as based upon the proposal, in my opinion, the true construction of the policy is that the Company agreed at the end of the Endowment period to pay the principal sum insured. They undertook also to pay at the same time an additional sum in respect of dividends accrued (if any) on the shares after retaining thereout all calls due and payable in respect thereof. Under Clause 3 they agreed to pay an additional sum in respect of dividends accrued after the period had expired during which the Company was at liberty to allocate the dividends towards the balance of the premium. In my opinion, under the Combined Investment Scheme the risk of the dividends not being sufficient to cover the balance of the premia was taken by the Company. It was contended by counsel on behalf of the Company that under the policy the Company was entitled to deduct from the principal sum when it became due any sum which was still outstanding in respect of the balance of the premia which at that time had not been in fact recovered oat of the profits of the Company. In my opinion, that is not in accordance with the terms of the contract. As it is admitted, therefore, that the plaintiff has paid the whole sum which the Company required him to pay during the Endowment Period under the policy, in my opinion, he is entitled to recover from the Company as a debt from the Company Rs. 20,000, being the principal sum insured. From that sum the Company, no doubt, might deduct any calls which in fact were due, but no calls are due, and, in my opinion, the Company is bound to pay the Rs. 20,000 without deduction, notwithstanding that the balance of the premia has not been recovered out of the dividends of the Company. The Company has paid no dividend since 1912. On the assumption however, that the Company is bound to pay as a debt to the plaintiff a sum of Rs. 20,000, Mr. Bose, on behalf of the defendant, has ingeniously argued that the Company is not bound to pay the Rs. 20,000 out of its General Fund, but that the debt of Rs. 20,000 is to be treated merely as a claim which is to be liquidated, in so far as funds are available, out of a certain fund created under Article 97 of the Articles of Association of the 16th of August 1915. There is evidence before me that this particular fund called the 'Combined Policy Holders Account' is insolvent, and, although the Company has other funds at its disposal, out of this particular account the Company would not be able to provide sufficient monies to liquidate the debt due to the plaintiff from the Company. Now, as I am satisfied that the plaintiff has an undoubted right to recover Rs. 20,000 from the Company, the question as to whether the Company can pay or how it will pay, is a matter which will have to be considered when the time comes for the plaintiff to put his decree into-execution. I think, however, that it is advisable in this case, as the matter has been urged by counsel on behalf of the defendant Company, that I should express my view on the question as to how far the plaintiff is bound by the alteration in Article 97 of the Articles of Association. Now, it is perfectly true that the plaintiff, being a shareholder in the Company, must be taken to know that one of the incidents of membership of a Company is that the Company may,, by adopting the proper method, bond fide alter its Articles in a way which may prejudicially affect his interest, and, provided that the alteration in the article is not inconsistent with the objects set out in the Memorandum of Association, and is bond fide made in the interest of the Company, the plaintiff as a shareholder in ordinary circumstances would be bound by such an alteration: Allen v. Gold Reefs of West Africa [1900] 1 Ch. 656, 671,672.

16. Sir Nathaniel Lindley, Master of the Rolls lays down the rule as follows:

The power thus conferred on companies to alter 'the regulations contained in their Articles is limited 'only by the provisions contained in the statute 'and the conditions contained in the Company's 'Memorandum of Association. Wide, however, as the 'language of Section 50 is, the power conferred by it 'mast, like all other powers, be exercised subject, to 'those general principles of law and equity which 'are applicable to all powers conferred on majorities 'and enabling them to bind minorities. It must be 'exercised, not only in the manner required bylaw, 'but also bond fide for the benefit of the Company 'as a whole, and it must not be exceeded. These 'conditions are always implied, and are seldom, if 'ever, expressed. But if they are complied with I 'can discover no ground for judicially putting any 'other restrictions on the power conferred by the 'section than those contained in it. How shares 'shall be transferred, and whether the Company shall 'have any lien on them, are clearly matters of 'regulation properly prescribed by a Company's 'Articles of Association. This is shown by Table A 'in the schedule to the Company's Act, 1852, Clauses 8, '9, 10. Speaking, therefore, generally, and without 'reference to any particular case, the section clearly 'authorizes a limited Company, formed with Articles 'which confer no lien on fully paid up shares, and 'which allow them to be transferred without any 'fetter, to alter those Articles by special resolution, 'and to impose a lien and restrictions on the registry 'of transfers of those shares by members indebted 'to the Company.'

'But then comes the question whether this can be 'done so as to impose a lien or restriction in respect 'of a debt contracted before and existing at the 'time when the Articles are altered. Again, speaking generally, I am of opinion that the Articles 'can be so altered and that if they are altered 'bond fide for the benefit of the Company, they 'will be valid and binding as altered on the existing 'holders of paid up shares, whether such holders are 'indebted or not indebted to the Company when the 'alteration is made. But as will be seen presently, it 'does not by any means follow that the altered article 'may not be inapplicable to some particular fully 'paid up shareholder. He may have special rights 'against a Company, which do not invalidate the resolution to alter the Articles but which may exempt 'him from the operations of the Articles as altered.'

Further on, the Master of the Rolls adds:---'But, 'although the regulations contained in a Company's 'Articles of Association are revocable by special 'resolution, a special contract may be made with the 'Company, in the terms of or embodying one or more 'of the Articles and the question will then arise 'whether an alteration of the Articles so embodied is 'consistent or inconsistent with the real bargain 'between the parties. A Company cannot break its 'contracts by altering its articles, but, when dealing 'with contracts referring to revocable Articles and 'specially with contracts between a member of the 'Company and the Company respecting his shares, 'care must be taken not to assume that the contract 'involves as one of its terms an article which is hot 'to be altered.'

17. The principle enunciated by the Master of the Rolls in Allen v. Gold Reefs of West Africa [1900] 1 Ch. 656., was considered by the Court of Appeal in the case of Baily v. British Equitable Assurance Company [1904] 1 Ch. 374,384,385; [1906] A. C. 35. In that case the question arose as to whether a Company had power by altering its Articles of Association to distribute to the shareholders, not the whole of the profits, but the whole of the profits less a reserve fund which was deducted, and the Court of Appeal held that the effect of such an alteration of the Articles was to cause the Company to commit a breach of its contract with the policy-holder. That case went to the House of Lords where it was reversed, but on the ground that in that particular case the share-holder must be taken to have anticipated that it was possible that the Articles would be altered so as to authorize a distribution of the profits less an amount set aside for reserve, and the House of Lords did not affect to disapprove the principles laid down by the Court of Appeal. Lord Justice Cozens Hardy in the Court of Appeal stated the principle as follows:

It is said that, apart from the statute, the deed, of settlement itself contained a power to alter the by-law of which power the plaintiff had notice. We cannot assent to this argument. As between, the members of a Company and the Company, no doubt this proposition is to some extent true. The rights of a shareholder in respect of his shares, except so far as they may be protected by the memorandum of association, are by statute made liable to be altered by special resolution: see Allen v. Gold Beefs of West Africa [1900] 1 Ch. 656.

But the case of a contract between an outsider and the Company is entirely different, and even a shareholder mast be regarded as an outsider in so far as he contracts with the Company otherwise than in respect of his shares. It would be dangerous to hold that in a contract of loan or a contract of service or a contract of insurance validly entered into by a Company there is any greater power of variation of the rights and liabilities of the parties than would exist if, instead of the Company, the contracting party had been an individual. A Company cannot, by altering its articles, justify a breach of contract.'

18. And Lord Lindley, in the House of Lords, while coming to the conclusion that the particular alteration in the article did not involve a breach of the Company's contract with the plaintiff, concludes his speech by saying:

Of course, the powers of altering by-laws, like other powers, must be exercised bond fide, and having regard to the purposes for which they are created, and to the rights of persons affected by them. A by-law to the effect that no creditor or policy-holder should be paid what was due to him would, in my opinion, be clearly void as an illegal excess of power. But in this case it is conceded that the alteration contemplated, and sought to be restrained, is fair, honest and business-like, and will, in the opinion of the directors and shareholders of the company, be beneficial as well to the policy-holders as to the shareholders. The sole question is whether such an alteration infringes the rights of the policy-holders. In my opinion it clearly does not.

19. Mr. Justice Sargant in the British Murac Syndicate, Ld. v. Alperton Rubber Co., Ld. [1915] 2 Ch. 186 held that the alteration of the article in that case was not an alteration which was applicable to the contract between the company and the plaintiff. In that case by one of the Articles it was provided that a certain Syndicate should have the right to nominate two directors, and the company, in the belief that certain nominees of the Syndicate were undesirable as directors, altered the Articles so as to authorize the Company to refuse to accept the Syndicate's nominees. Mr. Justice Sargant at page 193, passed these observations:

20. 'The principal authority on the subject is Allen v. Gold Beefs of West Africa [1900] 1 Ch. 656., where the Court clearly recognised that a Company cannot alter its Articles so as to commit a breach of contract, and further that even the Articles themselves might show that there was such a contract as that it would be unfair on the part of the Company to alter them. Here I have not to consider the latter point because there are present here both the provision in the Articles and the express obligation in the agreement under which the plaintiff syndicate is to have this express right'. Later on he adds that 'if the Court sees that a contract involves as one of its terms that an article is not to be altered, then the Company is not at liberty to alter that article so as to break that contract. In my judgment on the facts of this case the contract between the plaintiff syndicate and the defendant Company clearly involves as one of its terms that Article 88 was not to be altered, i.e., that the plaintiff syndicate so long as it held the stipulated number of shares was to have a perpetual right of nominating two directors of the Company'. [See also Sidebottom v. Kershaw Leese & Co., Ld. [1920] 1 Ch. 154; Dafen Tinplate Co., Ld. v. Llanelly Steel Co., Ld. [1920] 2 Ch. 124.]

21. Applying the principles thus laid down to the facts of this case I have to consider whether the alteration of the article in August 1915, (if it is applicable at all, having regard to the further alteration of the Articles in May 1922), involves such a breach of the contract which the Company made with the plaintiff as that it would be inequitable that the Articles as altered should be held to apply to that contract. In my opinion, the effect of the contention of the defendant Company is that, notwithstanding that the plaintiff has a valid claim against them for a liquidated sum of Rs. 20,000 the Company is entitled to deduct from such sum the balance of premia not recovered out of the dividends paid, and in addition is entitled to make a call in respect of any balance of the monies due on the shares which is outstanding; while the effect of the alteration of the article is that the-plaintiff's claim which the Company has ample means at their disposal to liquidate, is not to be paid by the Company out of their general assets, but is to be treated as a claim against a fund which is insolvent. It is not necessary for me to hold in these proceedings, that the Articles as altered are invalid; it may be that the right of the Company to alter its Articles is unimpaired, but, in my opinion, the effect of the alteration of the Articles is that it involves a fundamental breach of the contract which the Company had previously entered into with the plaintiff, and in respect of that contract the article is inapplicable. I come, therefore, to the conclusion that, in respect of that contract the article is inapplicable, and that although the plaintiff is a shareholder in the Company, in respect of this debt of Rs. 20,000 the directors would not be acting ultra vires in paying the sum of Rs. 20,000 out of the general assets of the Company which the directors are at liberty to allocate for the purpose of liquidating this and other business claims.

22. Mr. Bose, on behalf of the defendant further contended that it was ultra vires the directors to pay this sum, as in effect it would be paying back the capital of the Company, but, in my opinion, all that the directors would be doing would be paying an ordinary business debt, and not in any sense repaying capital monies of the Company. Under these circumstances there will be judgment for the plaintiff for the sum claimed with costs on scale No. 2. Interest on sum decreed at 6 per cent.

23. [ Note. On appeal this case was settled.]


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