P L D 1988 Karachi 279
Before Ajmal Mian. J
ALI MOHAMMED H.K.DADA‑‑Appellant
STATE LIFE INSURANCE CORPORATION OF PAKISTAN and 11 others‑‑ Respondents
Miscellaneous Appeals Nos. 28, 35, 38 and 49 of 1986, decided on 10th January, 1988.
Jan Muhammad Dawood, Shaikh Nasim Hassan and Muhammad Din Malik for Appellant.
Fazale Ghani Khan for Respondents.
Dates of hearing: 20th and 21st December, 1987.
By the common judgment, I intend to dispose of the above four Miscellaneous Appeals, as they involve same common points of law.
Miscellaneous Appeals Nos. 28 of 1986 and 38 of 1986 are directed against an order dated 10‑5‑1986 passed by the learned Insurance Appellate Tribunal, Karachi hereinafter referred to as the Tribunal, in Application No.9 of 1979, hereinafter referred to as the Application No. 1. decreeing a sum of Its. 17,18,510.33 being the excess management expenses incurred during the years 1959, 1960, 1961, 1962, 1963. 1964, 1965, 1966, 1967, 1968, 1969 and 1970, inter alia against the appellants in the two appeals. However, the Tribunal rejected the respondent No.1 i.e. State Life Insurance Corporation’s (hereinafter referred to as the Corporation) claim for Rs.31,01,782.56 being the amount of interest for the period commencing from 1‑1‑1959 to 30‑9‑1979 as being imaginary, whereas above Miscellaneous Appeals Nos.35 of 1986 and 49 of 1986 are directed against the order dated 12‑7‑1986 ,passed by the Tribunal decreeing a sum of Rs.1,89,546.17 being the amount of loans/advances to the employees and agents of M/s. Oriental Mutual Life Assurance Co. Ltd. in contravention of clause (d) of subsection (8) of section 29 of the Insurance Act, 1938, hereinafter referred to as the Act, in Application No.15 of 1979, hereinafter referred to as the Application No.2.
2. The brief facts leading to the filing of the above appeals are that by Life Insurance (Nationalisation) Order, 1972, hereinafter referred to as the Order, the insurance business was nationalised and its management was vested in terms of Article 4 of the Order in *the Central Government from the specified date, namely, 19‑3‑1972. The Central Government in terms of Article 5 of the Order first appointed trustees for the management of the life insurance business then in pursuance of Article 11 constituted the Corporation i.e. respondent No.1 from the appointed date which was 1‑11‑1972. The assets and liabilities in respect of the nationalised life insurance business were also vested in the Corporation by virtue of the various Articles contained in the Order. It may also be observed that under Article 22 the Corporation was empowered to seek relief in respect of the transactions of the insurers mentioned therein. It may bi advantageous to reproduce above Article 22 because the controversy in issue revolves around the above Article, which reads as follows:
“22. Right of Corporation to seek relief in respect of certain transactions of the insurer.‑‑Where an insurer whose life insurance business has been transferred to and vested in a Corporation under this Order has, at any time within fifteen years preceding the appointed date:‑
(a) made any payment to any person without consideration;
(b) sold or disposed of any property of the insurer without consideration or for an inadequate consideration;
(c) acquired any property or rights for an excessive consideration;
(d) entered into or varied any agreement so as to require an excessive consideration to be paid or given by the insurer;
(e) entered into any other transaction of such an onerous nature as to cause a loss to, or impose a liability on, the insurer exceeding any benefit accruing to the insurer;
(f) if a composite insurer transferred any property from his life department to his general department without consideration or for an inadequate consideration;
(g) acted, or omitted to act, in violation of any provision of the Act and has thereby caused a loss to, or, imposed a liability on, the insurer;
and the payment, sale, disposal, acquisition, agreement or variation thereof or other transaction or transfer was not reasonably necessary for the purpose of the life insurance business of the insurer or was made without reasonable cart: and prudence on the part of the insurer, regard being had in either case to the circumstances at the time, the Corporation may apply for relief to the Tribunal in respect of such transaction, and ail parties to the transaction shall, unless the Tribunal otherwise directs, be made parties to the application,
(2)The Tribunal may make such order against any of the parties to the application as it thinks just having regard to the extent to which those parties were respectively responsible for the transaction or benefit from it and all the circumstances of the case.
(3) Where an application is made to the Tribunal under clause (i) in respect of any transaction and the application is determined in favour of the Corporation, the Tribunal shall have exclusive jurisdiction to determine any claims outstanding in respect of transaction.
(4).Notwithstanding anything contained in this Article or anything contained in the Act the Corporation may bring suit under section 106 of the Act against any person to whom subsection (1) of that section is applicable.
(5) Any amount due to the Corporation in pursuance of an order, of the Tribunal under clause (3) or an order of the High Court under section 106 of the Act may be set off against any ‑compensation, debt liability or any money due by the Corporation to the insurer or its shareholders or directors under the provisions of this Order. including the amount of compensation payable under Article 39.”
3. In pursuance of the above Article the Application No.1 was filed on 23‑10‑1979 against 17 persons comprising of Ex‑Managing Director,, Directors and General Manager etc. whereas the Application ,No.2 was, filed on 25‑10‑1979 against 174 respondents comprising of Ex‑managing Director, Directors, General Manager and the employees? agents to whom the loans/advances were given. The above applications” were resisted by the present appellants in the above appeals. The” ‘Tribunal in the first two appeals framed eight issues, whereas in the aforesaid second two appeals also eight issues were framed.
4. In support of the Application No.1, affidavit of Usuf Bhai, Manager of the Corporation was filed, whereas the appellants’ respondents filed affidavit of appellant No.1 in Miscellaneous Appeal No.28 of 1986/respondent No.6 but since he was not tendered for cross‑examination. his affidavit was not considered An affidavit in evidence of Ijaz A. Mehmood, who was Respondent No.17‑A and the General Manager of Respondent No.2, was filed who was cross- examined. In addition to that Hassan Moizuddin son of Sardar Qazi Abdul Aziz, who was ‘appointed first trustee of the Respondent No.2 was examined by the appellants /respondents. The balance sheets of the years in question and annual reports of the Companies were also, produced, whereas, in application No.2, affidavit of said Usuf Brial ‘Ex, 30 was filed, whereas on behalf of the appellants/respondents aforesaid Ijaz Mehmood the General Manager of Respondent No.2 filed his affidavit. They were cross‑examined by the respective parties,
5. The Tribunal after hearing the parties passed the above two judgments. Mr. Ali Mohammed H.K. Dada, who was respondent No.7 in application No.1, being aggrieved by the above order filed ,Miscellaneous Appeal No.28 of 1986 in respect of the first order and Miscellaneous Appeal No.35 of 1986 in respect of the above second order, where as M/s. Shaikh Nasim Hassan. Maabool Hassan Chaudhry and Mian Rashid Atimad Mutsbarrat, who were respondent No.3, respondent, No. 4 U‑ no respondent No. 2 respectively in Application No. 1, filed Miscellaneous Appeal No.38 of 1986 against the first order, whereas Shaikh Nasim Hassan, who was respondent No.3 in application No.2 filed Miscellaneous Appeal No.49 of 1986 against the above second order.
6. Mr. Shaikh Nasim, Hassan, who has filed the above two appeals, and who is also an Advocate of the supreme Court, with the assistance of Mr. Muhammad Din Malik Advocate submitted the main arguments in support of the above appeals as follows.‑‑
(i) That the applications were time‑barred.
(ii) That the liability of the Managing Director and Directors of Respondent No.2 could not have been imposed beyond the terms of the Memorandum and Articles of Association of Respondent No.2.
(iii) That the appellants were not provided reasonable opportunity to defend themselves before the Tribunal.
(iv) That the excess management expenses were incurred for the growth of the business which did not result into any loss but brought profit to the life insurance business and, therefore, Article 2.2 of the Order was not attracted to.
(v) That the Corporation failed to bring on record sufficient material to indicate that factually the loans/advances were given in violation of clause (d) of subsection (8) of section 29 of the Act, and that in any case the same were given for the growth of business in good faith.
(vi) That in terms of the Act the Controller of Insurance, hereinafter referred to as the Controller, had effective control on the working of Respondent No.2, inasmuch as annual reports were submitted, annual special auditing was conducted and since no action was taken, it was presumed that the Controller had condoned the excess management expenses.
Mr. Jan Muhammad Dawood, who has appeared in the remaining two appeals, adopted the above arguments of Mr. Shaikh Nasim Hassat and re‑enforced the same on the question of limitation by urging that Article 90 of the First, Schedule to the Limitation Act is applicable as the relationship between the Managing Director/ Directors and the Company is that of Principal and Agents.
Mr. Fazl‑e‑Ghani Khan, who has appeared for the respondents in the above four appeals, has contended as under:
(i) That the applications were within time as the limitation period provided for in Article 22 pf the Order is 15 years.
(ii) That the liability of the Ex‑Managing Director and Directors of the Company is to be determined with reference to Article 22 read with the provisions of the Act and not with reference to the Memorandum and Articles of Association of Respondent No. 2.
(iii) That the appellants were provided fair opportunity to defend the applications.
(iv) That since admittedly the previous management had exceeded the limits of the management expenses provided in section 42‑8 read with rule 39 of the Insurance Rules, 1958, hereinafter referred to as the Rules, the Tribunal has rightly decreed the claim in respect thereof.
(v) That there was no evidence in rebuttal of the’ “Corporation’s evidence that the loans/advances exceeded the limits provided for in clause (d) of subsection (8) of section 29 of the Act,
(vi) That the Controller had not condoned the excess management expenses of the years in question.
7. Adverting to the question of limitation, it may be Observed that the above‑quoted Article 22 provides that where an insurer whose life insurance business has been transferred to and vested in a Corporation under the Order has at any time within 15 year preceding the appointed date has done any of the acts mentioned in, clauses (a) to (g), the Corporation may apply for relief to the Tribunal in respect of such transactions. In other words subsection (1) of Article 22 authorises the Corporation to take action in respect of any of the transactions referred to in the above clauses which had taken place within 15 years preceding the appointed date. As pointed out hereinabove, the appointed date was 1‑11‑1972, therefore, the Corporation could have taken action in respect of the aforesaid transactions which had taken place during the period commencing from 1‑11‑1957. However, the Article does not provide any period! within which the Corporation was supposed to take action in respect’ of the above transactions. It has been contended by the learned counsel for the appellants that the normal period of 3 years from the appointed date under Article 90 of the First Schedule to the Limitation Act is applicable, whereas it was urged by Mr. Fazl‑e‑Ghani Khan that the period of limitation is 15 years from the appointed date.
To re‑enforce the above submission, Mr. Shaikh Nasim Hassan has referred to the case of Naeem Finance Ltd. and another v. Bashir Ahmad Rafiqui, Administrator, Muslim Insurance Company Limited and another, reported in, P L D 1971 SC 8 in, which an application under section 106 of the Act was filed inter alia against Ex‑Managing Director of Muslim Insurance Company Ltd. in, the High Court, which was allowed. The matter went before the Hon ble :Supreme Court, where inter alia the question of limitation was agitated. It was held by the Hon’ble Supreme Court that Article 90 of the First Schedule to the Limitation Act was applicable to an application under section 106 of the Act. The relevant observations of the Supreme Court read as follows:
“The next question for consideration is which Article of the Limitation Act is applicable to the case of Dr. Muttaqt. Article 36 of the Limitation Act is not applicable to him, because ‘it refers to malfeasance, misfeasance or non‑feasance independent of contract. This Article, being a residuary one, governs suits for compensation for tortuous acts to which no special Article is applicable. The allegation of malfeasance, misfeasance or non‑feasance against Dr. Muttaqi is not independent of contract. The relation between him as managing director of the company and the insurance company in part is governed by numerous Articles in the Articles of Association. These Articles, therefore, constitute a part of contract between the company and the directors, This view is supported by a decision of the English Court in the case of Molineaux v . London Birmingham Manchester Insurance Company (1902) 2 K B 589. In this connection Cozena‑Hardy, L ‑ J. observed as under:‑
‘On principles, and apart from authority, it seems to us that a person, who accepts an appointment as director, knowing that the holding of a certain number of shares is a necessary qualification, and acts as director, must be held to have contracted with the company that he will, within a reasonable time, obtain the requisite shares either by transfer from existing shareholders or directly from the company.’
He further observed at page 596:‑
“The Articles though not themselves a contract between the company and the director, must be regarded as showing the terms upon which ‑ on the other hand ‑he agrees to act as director, and on‑ the other hand the company agrees to pay him remuneration for his service.
The appointment of Dr. Muttaqi was under the Articles of Association. ‘His duties are also defined in those Articles and, therefore, it cannot be said that his activities were independent of contract. He was also holding a general power of attorney from the Company. In these circumstances, Article 36 of the Limitation Act has no application to his case. The only Article that is applicable to him is Article 9th of the Limitation. Act. Being the managing director and an Attorney he was an agent of the Company and, therefore, will be liable for his neglect and misconduct in the discharge of his. duties under the said Article. Article 90 has been applied to cases of misfeasance against Directors in a number of cases namely, Bhagat Ram ,V. Bharat National Bank, ILR 5 Lah.27, Peoples Bank of Northern India v. Das Haj, AIR 1935 Lah. 705 and Peoples Bank of Northern India v. Margopal and others, AIR 1936 Lah. 268. The case of Dr. Muttaqi, therefore, falls under Article 90 of Schedule 1 of the Limitation Act, which provides that in other suits by Principals against Agents for neglect or misconduct, the period of limitation is three years from the date when the neglect or misconduct became known to the plaintiff. ‑
(8). It may be observed that above article 90 provides a period of three years in respect of other suits by principals against agents for neglect or misconduct from the date when the neglect or misconduct becomes known to the plaintiff. It was urged by Mr. Fazl‑e‑Ghani Khan that the above Article was not applicable as there was no relationship of that of a principal and of an agent between the corporation and the appellants. The learned counsel for the appellants, on the other hand submitted that the corporation in fact was acting on behalf of respondent No.2 in respect of the life insurance business and, therefore, there was relationship of that of principal and agent. Mr. Jan Muhammad Dawood to re‑enforce the above submission had referred to the following passage from the Indian Company Law by K. M. Ghosh, Ninth Edition: ‑
“Director”: ‑‑Director includes any person occupying the position of a director (Coventry & Dixon’s case (1880) 14 Ch.D.660) So, it seems that a secretary or a manager The true position of directors seems to be that of agents for the company with the powers and duties of carrying on the whole of its business,‑ subject however to the restrictions imposed by the Articles of Association and the statutory provisions (Faure Electric Accumulator Co. (1889) 40 Ch. D.141, See also Ferguson v. Wilson (1866) 2 Ch. App.77 and Gramophone & Typewriter Ltd. v. Stanley (1908) 2 K.B.89 (G.A.Y. But the directors are not agents for the shareholders (Poole, Jackson & Whyte’s case (1878)9 Ch. D.322, nor are they trustees or the creditors of the company (Ashbury Ry. Co. v. Riche (1875) L.R.7 M.L.653), nor are they trustees, in whom the property of the company is vested in trust for any specific purpose within the meaning of section 10, Limitation Act (Narasimha Iyengar v. Official Assignee (1913) M.58; Kathiawar Trading Co. v. Virachan.d (1894) 18 Bom. 119).
Mr. Shaikh Naseem Hassan has also pointed out that since the provisions of section 106 of the Act are pari materia with Article 22 of the Order, the ratio decidendi of the above Supreme Court case is very much applicable to the present cases.
I am not inclined to agree with Mr. Fazl‑e‑Ghani Khan that Article 22 of the Order provides a period of 15 years from the appointed date for filing of an application. The period of 15 years, has been provided in the above Article 22 not for filing of an application from the appointed date but for filing an application in respect of a transaction which had taken place at any day during the 15 years preceding to the appointed date. It, fact no period for filing of an application from the appointed (late has been provided for. If I were to accept the contention of Mr. Fazl‑e‑Ghani Khan, it would be contrary to the language employed by Article 22 of the Order and it would provide a limitation period of 30 years i.e. 15 years preceding to the appointed date and 15 years subsequent to the appointed date. As observed hereinabove, factually no period has been provided from the appointed date for filing of an application under above Article C 22. The above view, which I am inclined to take, finds support the fact that the Federal Government in exercise of the conferred by Article 48 of the Order has amended the Life Insurance Nationalisation Rules 1972 and added sub‑rule (2) to rule 15 providing a period of 7 years from the appointed date for presenting of an application under above Article 22. however, it was submitted by Mr. Fazl‑e‑Ghani Khan that above rule has been provided in order to make the period of limitation more reasonable. In my view the above contention is devoid of any force as if in fact a period of 15 years has been provided under Article 22 for filing of an application from the appointed date, the same cannot be modified by framing the above sub‑rule. It is a well‑settled principle of law that a subordinate legislation cannot modify the provision of the substantive statute. Therefore, it is evident that the above rule has been provided for providing limitation for filing of an application from the appointed date. This leads us to the question which of the Article of Limitation Act was applicable to an application prior to the framing of the, above rule on 22‑10‑1975. One view can be that Article go of the First Schedule was applicable as to some extent the provisions of section 106 of the Act and Article 22 of the Order are akin. The other view can be that residuary Article l20 of the Limitation’ Act could be applicable as the liability created under Article 22 is a statutory liability somewhat different from the liability under section 106 of the Act on certain material particulars It has been held in the case of Messrs Malik Muhammad Din & Sons v Trustees of the Port of Karachi, reported in P L D 1967 Kar.191 by a Division, Bench of the erstwhile High Court of West Pakistan at Karachi that suit for the recovery of storage and wharfage charges payable under the Karachi Port Trust Act, a period of ‑six years of Limitation Act under Article 120 is applicable.
In the present case the factum, whether we apply Article 90 or 120.of the Ist Schedule does not make any difference as if I were to hold that at the time of the institution of the above two applications, above sub‑rule (2) of Rule 15 of the Life Insurance Nationalization Rules, 1972 providing 7 years period was applicable as the above applications were filed within 7 years from the appointed date i.e. on 23‑10‑1979 and 25‑10‑1979 whereas the appointed date was 1‑11‑1972. However, it was submitted by Mr. Shaikh Nasim Hassan that the above rule could not have revived a cause of action for filing of an application which had already become time‑barred. In furtherance of his above submission he has referred to the case of Ghulam Haider v. Mst. Raj Bhari and 4 others reported in P L D 1973 Lahore 372 and the case of Mst. Fattan Bi and 2 others v. Fateh Muhammad and 6 others reported in P L D 1974 Lahore 458 In the first case, a learned Single Judge of the Lahore High Court while construing Order 22 read with Law Reforms Ordinance (XII of 1972) held that after abatement of the appeal, the respondent had acquired valuable right and he could not be deprived‑of that right on the ground that the law of abatement had been abolished by above Ordinance No.XII of 1972; whereas in the second case another learned Single Judge of the Lahore High Court held that a matter is to be decided in accordance with law of limitation as in force at time of institution of that matter and not according to law prevailing at the time when cause of action arose. It was further held that the above principle would apply where the right to institute that proceeding had not become barred on the date when the amended Act was enforced mid that the principle of law, therefore, is that where a plaintiff or petitioner has lost his right to institute proceeding on the date when some other Act comes into force, that right is not revived by the repeal of the statute under which the limitation for those proceedings has expired. Reliance was placed on the cases namely, Bank of India v. Muhammad Ashraf and others P L D 1965 Kar.69; Appasami Odayar and others v. Subramanya Odayar and others 15 I.A. 167; Pearay Lai and others v. Solu Gir A I R 1946 All. 58; Monesti Narain v. Taruck Nath 20 Cal. 487=20 i.A.30 (F.C); Sachindra Nath Rvy v. manaraj Baliadur Singi, A I R 1922 P.C.187; Ghulam Haider v Raj Bhari P L D 1973 Lahore 372, Bear Lake Irrigation Co v. Garland 164 U S.1, 17 S.Ct. 7 L Ed. 327 and Wright v. Oakley 5 Mete. (Mass.) 400 ref.
He has also referred to section 6 of the General Clauses Act, which provides that where this Act, or any Central Act or Regulation made after the commencement of this Act, repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not:‑
(a) revive anything not in force or existing at the time when the repeal takes effect; or
(b) affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder; or
( c) affect any right, privilege, obligation or liability’ “acquired,’ accrued or incurred under any enactment so repealed; or
(d)affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any enactment so repealed; or
(e) affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty forfeiture, or punishment as aforesaid.”
In my view the above rulings and section 6 of the General Clauses Act have no application to the instant cases as the above sub‑rule of rule 15 of the Life Insurance Nationalisation Rules, 1972 was framed within three years from the appointed date i.e. 1‑11‑1972 as the above rule was framed on 22‑10‑1975. In terms of Article 48 the Central Government was empowered to frame the rules on any matters enumerated therein or any other matter which has to be or may be prescribed.
I am, therefore, inclined to hold that since the two applications were filed within the period prescribed by the above rule 15(2) of the Life Insurance Nationalisation Rules, 1972, the same were within time. Section 29 of the Limitation Act will be attracted to and the provisions contained either in Article 90 or 120 of the First Schedule to the Limitation Act would not be applicable from the date of the enforcement of the above rule,
9. As regards the second submission that the liability of *the Managing Director and Directors of respondent No.2 could not have been imposed beyond the terms of the Memorandum and Articles of Association of Respondent No.2, it may be observed that Shaiki. Nasim Hassan learned counsel for the appellants has referred to Article 52 of the Memorandum and Articles of Association of Respondent No.2, a photostat copy of which is produced, and which provides that, every Director, General Manager, Auditor, Secretary and any other officer or servant of the company shall be indemnified against, and it shall be the duty of the directors out of the funds of the Company to pay all costs, losses, and expenses which any such officer or Secretary may incur or become liable to by reason of any contract entered into or act or thing done by him as such officer or servant or in any way in the discharge of his duties and the amount for which such indemnity is provided shall immediately attach as a lien on the property of the Company and have priority as between the members over all other claims.
In my view the above contention is devoid of any force as the above provision in the Memorandum and Articles of Association, of Respondent No.2 cannot negate either the provisions of the Act or of the Order. It may be observed that under section 106 of the Act an application of the nature in question could have been filed and whereas P under Article 22 which is more wide in its scope a similar application has been provided for. The liability which has been created is by law, which will prevail over any contracted matter between a Company and its directors.
10. Reverting to the third submission that the appellants were not provided reasonable opportunity to defend themselves, it may be observed that Mr. Shaikh Nasim Hassan has emphasised that in spite of the direction of the Tribunal, the Corporation withheld the production of the documents summoned by the appellants, which inter alia included minutes of the books of the meetings of the directors of Respondent No.2, audited balance sheets of the Corporation pertaining to last five years and some other documents; whereas the case of the Corporation is that whatever documents were available, they were shown to the appellants and were produced before the Tribunal.
I am inclined to hold that keeping in view of the fact that the Life Insurance business of all the Life Insurance Companies was nationalised, it is plausible that some of the documents pertaining to Respondent No.2 might have not been traceable. However, there seems to be no reason for non‑production of the audited balance sheets of the last five years of the Corporation, The latter documents do not pertain to Respondent No 2 and, therefore, it cannot be said as to flow non‑production of the above documents affected the appellants. In any case, the view which I am inclined to take in the present cases makes the above submission insignificant.
11. As regards the decreeing of the above sum of Rs.17,18,510.33 being the excess management expenses for the above years 1959 to 1970, it may be observed that Mr. Fazi‑e‑Ghani Khan has relied upon Section 42‑B of the Act and rule 39. The former empowers the Controller to compliance with the provisions of sections 40,40‑A, 40‑B, 40‑C, 42-A, 44‑A and 44‑B and to ask the information and to issue directions or to do the acts mentioned therein, whereas the latter provides the schedule for the management expenses, Mr. Fazl‑e‑Ghani Khan has also referred various provisions of the Act and the Rules in order to demonstrate that the object of the Act was to give effective control over the funds of the life insurance which belonged to the public. The above provisions, inter alia, include the provision for investment of the life insurance fund in the specified securities etc.
On the other hand, it was submitted by Mr. Shaikh Nasim Hassan that the factum that the Controller, who had unlimited/ uncontrolled powers under the Act, had not taken any action against the appellants while they were managing Respondent No.1 indicates that he had condoned the excess management expenses, which he was competent to condone, It was further urged by him that in any case in order to bring a case under Article 22 of the Order in addition to the factum That excess management expenses were incurred in a particular financial year, the Corporation was supposed to prove that respondent No.2 has suffered loss. He has also referred to the annual reports of Respondent No2 to canvass at the Bar that inspite of the fact that Respondent No.2 being a mutual assurance company had no paid‑up capital accumulated substantial assets because of the hard work of the management and that the above excess management expenses were incurred for the growth of the Company and not for causing any loss. He has also submitted that though 70% business and assets pertained to erstwhile East Pakistan but even in West Pakistan at the time of taking over of the management of Respondent No.2 under the Order by the corporation the value of the assets ran into crores of rupees.
I have reproduced, hereinabove, Article 22 of the Order, Both the learned counsel have referred to clause (g) of subsection (1) of Article 22 which was added to by Act LXVII of 1973 and which imposes liability if the insurer acted, or omitted to act, in violation o any provision of the Act and has thereby caused a loss to, or, imposed a liability on, the insurer.
I am inclined to hold that in order to attract the above clause (g) simpliciter proving of the factum of excess management expenses in a particular financial year is not sufficient but it should also be proved that it resulted into loss or imposition of liability on the insurer. If the incurring of excess management expenses has resulted into growth of the assets of the insurer, the above clause (g) would’ not be attracted to.
Mr. Shaikh Nasim Hassan has referred to the following cases:
(i) Commissioner, Income Tax. Karachi v. M/s. New India Assurance Co. Karachi, reported in 1978 P T D 97, in which a Division Bench of this Court while dealing with an income‑tax reference under section 66(l) of the Income Tax Act, 1922, held that for the purpose of deduction of admissible expenses under section 10 of the Income Tax Act, the Income Tax Department was to be guided by the provisions of the above‑ section 10 and not by the factum that the management expenses is claimed were incurred in violation of rule 40 of the Insurance Rules. It was further held that the management expenses in excess and in contravention of the maximum prescribed in this behalf under rule 40 of the Insurance Rules could be deemed to have been incurred wholly and exclusively for the purposes of the business under section 10(2)(xvi) and could be allowed as such.
(ii) Commissioner of Income Tax Central, Karachi v . Messrs Alpha Insurance Co. Ltd. and another, reported in P L D 1981 Supreme Court 293. In the above case the Hon’ble Supreme Court while dealing with the question referred to in the above‑cited case, held that expenses of management incurred in excess of limit prescribed under section 40‑C of the Insurance Act, 1938 and Rule 40 of the Insurance Rules is not in the nature of penalty, fine or forfeiture for purpose of their admissibility for deduction as business expenses under section 10 of the Income Tax Act, 1922 but could be admissible as business expenses.
On the other hand Mr. Fazl‑e‑Ghani Khan has referred to the following cases:
(i) The Neptune Assurance Co. Ltd. v. The Life Insurance Corporation of India and another (A I R 1963 Supreme Court 900 (V 50 C 136) page 900. In the above case the Indian Supreme Court held that the right to claim refund of the excess amount of income‑tax paid existed on 1‑9‑1956 in respect of the life insurance business and, therefore, by virtue of section 7 of the Life Insurance Corporation Act, 1956, the Corporation was entitled to claim its share as it was an asset contemplated in terms of above section 7.
(ii) Dr. A. Lakshmanaswami Mudaliar and others v. Life Insurance Corporation of India and another A I R 1963 Supreme Court 1185 (V 50 C 180). In the above case the facts were that a Life Insurance Company on July 15, 1955 at an extraordinary General Meeting of shareholders passed the resolution sanctioning a donation of Rs.2 lakhs out of the shareholder’s Dividend Account to a certain memorial trust proposed to be formed with the object of promoting technical or business knowledge including knowledge in insurance and authorizing the directors to pay this sum to the said trust. The director accordingsly paid the above sum by December, 1955. On July 1, 1956 the Life Insurance Corporation Act came into force and on the appointed date i.e.1‑9‑1956 by section 7 of the Act all assets and liabilities of the Insurance Company stood transferred to and vested in the Life insurance corporation On September 3G, 1957 the Life Insurance Corporation called upon the Trustees of the Trust to refund the amount of Rs.2 Lacs received by them as donation from Insurance Company . On their denial of the liability the Life Insurance Corporation applied to the Life Insurance Tribunal, before which it was contended that we directors of the Company were authorized by the Articles of Association of the Company to make such donations towards any charitable or benevolent object and that the amount of Rs. 2 Lacs was paid out of the shareholder: Dividend , Account which was distinct and separate from the general assets of the Company. The above contention was repelled and it was held that the right of the Corporation to demand payment of the above amount if the resolution sanctioning payment was unauthorised could not be challenged in view of the, express provision in section 15 of the Life Insurance Corporation Act and that the above amount of Rs.2 Lacs was part of dividend account but since the dividend was not declared, no amount had become payable , to the share‑holders.
(iii) General Assurance Society Ltd. v. Life Insurance Corporation of India A I R 1964 Supreme Court 892 (V 51 C 115), in which it has been held by the Indian Supreme Court that the Indian Life Insurance Corporation by virtue of sections 7, 16 and 48 of the Life Insurance Corporation Act, 1956 read with Rule 18 of the Life Insurance Corporation Rules, 1956 was entitled to claim set off against the compensation payable under para 1 of Part A of Schedule I to the Act. it has further been field that the unclaimed declared dividend also vests in the Corporation by virtue of section 7 of the above Act.
12. The judgments relied upon by Mr. Fazl‑e‑Ghani Khan indicate that the Indian Supreme Court has held that in view of the provisions of the Life lnsurance Corporation Act, 1956 read with the Rules framed thereunder, the Indian Life Insurance Corporation was entitled to claim any amount which was payable to a Life Insurance Company in respect of the life insurance business on a’ date when the assets of such Insurance Company stood vested in the Life Insurance Corporation. They further indicate that it has also been held that the Life Insurance Corporation was entitled to claim the refund of the money wrongly paid from the life insurance fund by the previous management even from a third person, who may be the recipient of such money.
In my view the above case are not directly on the point in issue.
On the other hand, the two cases relied upon by the learned counsel for the appellants support the contention of the learned counsel for the appellants, inasmuch as they indicate that mere contravention of the provisions of the Act or the rule in relation to the management expenses does not per se renders such expense., non‑admissible as business expenses under section 10 of the Income Tax Act. The above analogy can be extended to the instant cases, namely, that per se the factum of excess management expenses in a particular year does not make the previous managing director or directors liable under Article 22 of the Order, but to make them liable the factum of loss or the imposition of the liability on the insurer is also to be established. The Corporation has not brought on record any material to prove the factum of loss or the factum that the above excess management expenses resulted into imposition of Liability on the insurer. On the contrary, it seems that it has been consistent practice in the life insurance business that the management expenses were more than prescribed by rule 39 and in’ spite of various checks which the Controller exercises under the Act, no action was taken against the Respondent No.2 or its Managing Director or Directors etc. I had the occasion to dilate upon the above question, inter alia, in M.A. No.12 of 1980, wherein I have noticed that ever the Corporation had been incurring excess management expenses, I may reproduce the relevant observation from my judgment dated 1‑11‑1972 given in above M.A. No.12 of 1980 (Mercantile, Mutual Insurance Co. of Pakistan Ltd. and others v. The State Life Insurance Corporation of Pakistan), which reads as follows:
(i) ISSUE NO‑9‑‑ This pertains to a claim of Rs.4,59,363 being the amount of alleged, excess management expenses incurred by appellant No.1 in the first appeal mentioned in Annexure ‘B’ to the application,. It has been contended by Mr. Abdul Rauf that from the statement of P.W.2 Muhammad Fareed, it is evident that all the Insurance Companies including the Corporation incur more annual expenses on the management than those prescribed under Schedule framed under section 4G of the Act. It may be observed that Muhammad Fareed has admitted in his cross‑examination that the excess expenses in relation to the Corporation comes into crore of rupees. It was also come on the record that normally the Controller of Insurance condones such excess management expenses. The Tribunal itself was of the view that Corporation was not entitled to recover the total amount of Rs.4,59,363 in this regard and awarded a sum of Rs.25,000 only. I am inclined to hold that in view of the factual position which has emerged from the evidence on the record, it was the practice in the Life Insurance business that the annual management expenses used to exceed from the prescribed limits, which lapse on the part of the life insurance companies used to be condoned by the Controller of Insurance as a matter of course, the Tribunal was not justified in awarding the above sum of Rs.25,000 which figure has not been arrived at on any concrete basis. After having concluded that the Corporation was not entitled to the above sum of Rs.4,59,363 it was not proper to apportion the above amount without having any reliable material on the record.”
I am. therefore, of the view that the Tribunal was not justified in the instant cases to decree the above sum of Rs.17,18,510.33 being the excess management expenses for the above years 1959 to 1970. 1 would, therefore, reverse the above finding and set aside the judgment under appeal and would allow the above Miscellaneous Appeals Nos.28 of 1986 and 38 of 1986 with no order as to costs.
13. As regards the loans and advances given to the respondent No.21s employees/agents, it may be observed that clause (d) of subsection (8) of section 29 provides as follows:‑
(d) temporary advances to an employee, insurance agent or employer of agents not exceeding:‑
(i) in the case of an employee, two months, salary;
(ii) in the case of an insurance agent renewal commission earned by him during two years immediately preceding the date of application for the advance, or a sum not exceeding two hundred and fifty rupees if he has not earned renewal commission or has earned a renewal commission of less than two hundred and fifty rupees;
(iii) in the case of an employer of agents, the renewal commission and the overriding renewal commission earned by him during the year immediately preceding the date of application for the advance, or a sum not exceeding one thousand rupees if he has not earned any renewal commission and overriding renewal commission or has earned a renewal commission and overriding renewal commission of less than one thousand rupees;
0v) the loan does not exceed such amount as may be prescribed, and is subject to such conditions, including conditions as to interest and the time allowed for its payment, as may be prescribed; and
(v) the aggregate of such loans in respect of the Life Insurance, business of the insurer does exceed such amount as may be prescribed:
Provided that, in respect of the Life Insurance business of an insurer, other than the State Life Insurance Corporation of Pakistan the total temporary advances referred to in this clause shall not exceed at any time ten thousand rupees in the case of insurer having a life insurance fund of less than ten lacs of rupees and one per cent of the life insurance fund subject to a maximum of two hundred thousand rupees, in any other case:
Provided further, that, in respect of the life insurance business of an insurer, the total amount outstanding in respect of temporary advances made on or after the Ist January, 1975, shall not exceed at any time one‑tenth of one per cent of the life insurance fund in the case of employees on the one hand and one‑tenth of one per cent of the life insurance fund in the case of insurance agents and employees of agents on the other. “
Alongwith the application schedules marked A, B, C and D have been annexed indicating the names of the persons against whom various amounts were outstanding. However, it has not been indicated as per above clause of subsection (8) how much amount was admissible to each of the persons named‑ However, Mr. Fazl‑e‑Ghani Khan, learned counsel for the Corporation has vehemently urged that the statement of respondent’s witness that only Rs.34,677.35 could have been given as loans advances in terms of clause (d) of subsection (8) of section 29 of the Act remained unchallenged and, therefore, the Corporation after adjusting a sum of Rs.10,158.55 which amount was recovered by the Corporation after Nationalization a balance of Rs.1,89,546.17 has been claimed. In this regard it may be pertinent to reproduce the cross‑examination of Corporation’s witness Usuf Bhai conducted on 2‑5‑1983 which reads as follows:‑
“I do not know if personal files of’ the Agents/ Employers of Agents who are made respondents in this case were available with us. I do not know if any decree had been passed by any Court ‑against some of the respondents’ agents for the amount claimed in this application. I do not know whether cases were pending against some of the respondents in the Court in respect of said claim. I do not know whether notices were given to them by the Respondent Company. We have filed the application against the respondents according to the record available with us. It is incorrect that the claim shown against the Respondents Agents are their commissions. I do not remember if we had shown any personal files of certain Agents and Employers of Agents to Mr. Ijaz Mahmood Respondent No.17‑A, when he visited our office, for the purpose of inspecting certain record.”
The above statement of the witness in the cross‑examination belief the Corporation’s case. It appears that the claim was made without even caring to carry out full investigation on all aspects of the items in question. I cannot overlook the fact that the entire record was taken over by the Corporation and the appellants had no record available with them in order to refuse the Corporation’s claim. The above‑quoted provision of clause (d) of subsection (8) of section 29 of the Act wherein special treatment has been provided in the proviso in relation to the Corporation indicates that the loans and advances used to ‘be given sometime in excess of the limit provided therein for the growth of the business. The appellants’ witness Ijaz Mahmood has also explained the above point in his statement. I may again observe that simpliciter the factum that the excess amount of loans/advances were given to respondent No. 2’s employees/agents would not necessarily lead to the conclusion that it resulted into loss to the insurer or imposition of liability on it. I had the occasion to deal, with the above question in the above M.A. No.12 of 1980 and also in M.A. No.64 of 1984. It will suffice to quote herein below the relevant observation from my judgment dated 29‑11‑1987 given in Mp. No.64 of 1984 (Messrs Pakistan mutual Insurance Co. Ltd. v. State Life Insurance Corporation and others), which reads as follows:‑
“It may be observed that under subsection (8) of section 29 of the Act an insurance company is authorised to advance loans to its employees/ agents within the limit prescribed therein ‑In the instant case the Corporation has not brought anything on record even to show prima facie that the loans advanced y the appellant to its employees were beyond the limits prescribed in the above section 29. Not a single word‑ has been said either in the affidavit‑of‑evidence or in the cross-examination by aforesaid Yusuf Bhai. The amount of claim of the application comprised of two items, loans and imprest money entrusted to the Managers of the appellant of the Branches of Bahawalpur, Multan, Lahore and Rawalpindi. Nothing has also been said either in the affidavit or in the cross‑examination by the above witness that the above imprest money were beyond the normal limits. Nor it has been brought on record that after the nationalisation, the above respondents Nos.12 to 15 had ceased to be the employees of the Corporation and that they had not accounted for the imprest money. The above witness in his cross‑examination dated 7‑5‑1983 has admitted the amounts of imprest moneys.
I am inclined to hold that in the absence of any evidence on the points referred to hereinabove no money decree could have been passed against the appellant or its Chairman, Managing Director and Directors. I may refer to my unreported judgment dated 1‑11‑1987 given in Miscellaneous Appeal No.12 of 1980 (Mercantile Mutual Insurance Company of Pakistan v. The State Life Insurance Company of Pakistan), in which while dialating upon the question of liability of a insurance company as regards the loans to its employees/ agents I observed as follows:‑‑
(h) Issue No.8.‑‑The Corporation had claimed a sum of Rs.35,045.15 with future interest against respondents Nos.1 to 9 in the application jointly and severally with respondents Nos.12 to 117 on the ground that the advances given by respondent No.1 to the insurance agents and its employees, were against the provision of section 29 of the Act. In this regard, Mr. Abdul Rauf has invited my attention to clause (d) of subsection (8) of section 29 of the Act which relates to temporary advances to employees/agents and has pointed out that the Corporation has not brought or) record any material to indicate that the prescribed limits had been exceeded to in any of the above case and, therefore, the Tribunal was not justified in decreeing the above amount against the appellants Nos.1 and 3 to 10 and respondents Nos.12 to 117 in the above application. There seems to be no material on record to indicate that the ‑amounts prescribed in sub-clauses (i) to (iv) of clause (d) have been exceeded to in any of the cases referred to in para. 16 of the application. On the contrary the Schedule indicates that meagre amounts, were advanced as advances. I would, therefore, reverse the finding of the Tribunal on the above issue and set aside the decree in respect thereof.”
14. I am, therefore, inclined to hold that no decree could have been passed for the amount of loans/advances against the appellants in the capacity of Managing Director/ Directors in the absence of the T aforesaid material facts and the proof of the factum of loss or the imposition of liability on the insurer. I would, therefore, modify the order dated 12‑7‑1986 to the extent of setting aside the decree against the appellants of above M.A. Nos.35 of 1986 and 49 of 1986 with no order as to costs but would maintain the decree against the other respondents who had not filed any appeal.
The above appeals stand disposed off in the above terms.
M.B.A./A‑252/K Order accordingly.