India: The Story Of Sahara India Life Insurance Company And IRDAI At The Securities Appellate Tribunal

Last Updated: 7 February 2018
Article by S.S. Rana & Co. Advocates

Introduction:

"Not only must Justice be done; it must also be seen to be done."

-Lord Chief Justice Hewart

One of the primary function of any adjudicating authority is to read and interpret the legislations in light of its object and also with the object of administering justice.

In a recent case involving the Sahara India Life Insurance Company Limited (hereinafter referred to as "Sahara or Appellant") wherein an order adversely and fatally affecting the business of Sahara, passed by the Insurance Regulatory and Development Authority of India ("IRDAI") without providing Sahara an opportunity of being heard was held to be violating the principles of natural justice.

The Securities Appellate Tribunal (hereinafter referred to as "SAT"), before whom the appeal was made thereby ordered for the partial quashing off of the order, and sent the case back for review to the IRDAI. This order passed by SAT also observes a detailed account of all the provisions of the Insurance Act, 1938 to come to a conclusion.

What is IRDAI?

Insurance Regulatory and Development Authority of India is an authority constituted under Section 3 (1) of the IRDA Act, 1938, and also derives its authority from the Insurance Act, 1938. One of the main regulatory functions is to protect the interests of the policy holders against the Insurer with regards to the insurance funds from the risk of fraud, misfeasance and misappropriation of funds.

Story so far:

Against the order of IRDAI, an appeal was filed by Sahara India Life Insurance Company Limited, at the SAT.

Facts of the case before going in appeal:

In March, 2016, the IRDAI observed that certain provision in the Annual Report (FY 2014-2015) of Sahara were prejudicial to the interests of the policy holders as IRDAI was of the opinion that the promoters involved in Sahara were not 'fit and proper' as they were shareholders of Sahara India. Inspite of various notices issued to Sahara it failed to respond and therefore a show cause notice ("SCN") was issued by IRDAI against Sahara. Later in the Order, it was observed that Sahara had responded, however, reminders had to be issued due to unsatisfactory response by Sahara.

Upon request, when the opportunity of being heard to Sahara was adjourned, IRDAI appointed an Investigating Authority, whose final report was not furnished to Sahara. On the basis of this report, IRDAI appointed an Administrator. The report of the administrator was also not shared with the Appellant.

Further, on the basis of the Administrator's report, dated June 22, 2017, the IRDAI forthwith passed another impugned order dated June 23, 2017, calling upon the Appellant not to procure/collect proposal deposits/underwrite new business with immediate effect, i.e., essentially ordering close of business on 23 June. Also, the business of Sahara was entirely transferred to ICICI Prudential Life Insurance.

Again, an opportunity of being heard was not granted to the Appellant before taking such extreme and drastic steps against it.

Appellant's contentions:

Challenged the appointment of the Administrator:

The Appellant inter alia contended that the Administrator was appointed even before concluding the investigation which is untenable.

Further, it contended that there was no basis provided for declaring the that the promoters were not 'fit and proper'.

Violation of principles of Natural Justice:

It was also argued on behalf of the Appellants that the IRDAI must be guided by the principles of natural justice and proportionality while taking such harsh regulatory measures or imposing punishment.

The Counsel for Sahara further contended that a bare perusal of the scheme of the Insurance Act, would clearly show that IRDAI is required to observe restraint before coming to the conclusion of transferring a running business of an Insurer company to some other insurer or declare the promoters of an Insurer company as not 'fit and proper'.

Not only restraint is to be observed, but also providing the bearer of the orders an opportunity to make a representation in connection with the report.

Respondent's contentions:

Protection of the Policy Holder's interests:

The IRDAI stated that it took such immediate measures in pursuance of its solemn duty to regulate these insurers and therefore, the Administrator was appointed to ensure the safety of policyholders' interest. The IRDAI stated that it had observed a grave risk in the promoters of Sahara as the Appellant had transferred majority of its business to Sahara India and was thereby obligated to take necessary action.

No Violation of Natural Justice:

With regards to the violation of principles of natural justice, the Respondent stated that an opportunity of being heard was duly granted to the Respondent when repeated notices, reminders etc. were issued by it and also when an opportunity of arguing before it was granted.

Challenge to maintainability of the Appeal:

The Respondents also challenged the maintainability of the appeal. They contended that the instant appeal was not maintainable since after an Administrator is appointed the management's rights and power over the business of the Insurer was taken away. Here an analogy was drawn between the Insurance Act and the Insolvency Bankruptcy Code, 2016, stating that the appointment of an Administrator is similar to the appointment of the Insolvency Professional. The SAT however observed that placing reliance on the latest judgment of the Hon'ble Supreme Court in Innoventive Industries Limited Vs. ICICI Bank Ltd. [2017 SCC Online SC 1025] is totally misplaced.

SAT views:

Appointment of the Arbitrator- Natural Justice

The SAT after noting the sequence of events, stated that though the opportunity granted by the IRDAI to the Appellant pursuant to reminder and notice dated June 09, 2017, for personal hearing was limited in nature and narrow in scope, yet even the limited opportunity granted to the Appellant is sufficient in the circumstances of the case.

The Appellant was itself delaying the sending of a proper reply or sending unsatisfactory replies, in respect of the SCN of March 2017, IRDAI had given it an opportunity of being heard, however limited, and the hearing was adjourned for 2 days upon request. Pursuant to this sequence of facts, the SAT considered it unreasonable to order that a fair opportunity was not given to the Appellant before appointment of the Administrator.

*It is significant to note here that the SAT ruled on the contrary with regards the transfer of business from Sahara to ICICI Prudential Life Insurance. From this we can infer that the 'fairness' and 'scope' of an opportunity of being heard also proportional to the gravity of the order that is to be passed by the adjudicating body subsequent to such opportunity.

Maintainability of the Appeal

The argument of the IRDAI that the Insurer company cannot challenge the very appointment of the Administrator by way of this appeal was held to be untenable by SAT as it would only lead to absurdity inasmuch as no Insurer company would ever be in a position to approach this Tribunal by way of appeal under Section 108 of the Insurance Act to challenge the appointment of an administrator. SAT placed reliance on Closegate Hotel Development (Durham) Ltd. & Anr. Vs. Mclean & Ors. Reported in 2013 EWHC 3237 (Ch).

"I do not think paragraph 64 is intended to catch a power on the part of the directors to cause the company to make an application challenging the logically prior question of whether the administrator has any powers to exercise at all." 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.

The SAT stated that "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."

Closure and Transfer of Sahara's business:

With regards the harsh order of closure of business and its transfer to another Insurer a reasonable opportunity was require to be given Sahara. Noting the adverse and severe effect of this order on Sahara, SAT noted that a copy of the report of the Administrator should have been supplied to the so as to enable them to make a representation on the said report.

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 any event, the report and its outcome have potentially and adversely affected the appellant, therefore, the IRDAI must have supplied a copy of the report to the appellant before passing the impugned order. In view of the same, SAT ordered for the case to be tried by the IRDAI from the stage of seeking response from Sahara with regards the Administrator's report.

CONCLUSION:

It is safe to note that application of the judicial mind or what is otherwise referred to as "juris" prudence does merely mean reading the law, but also interpreting the law in such as away so a to meet the ends of justice. Sometimes when the laws are followed to and adhered to in black and white, and yet justice is not seen to be done, it is the duty of the adjudicating body to go beyond the letter of the law, employ long standing judicial principles, judicial axioms and theroies to meet the ends of justice wherever required. Here even thought the Acts did not require for an opportunity of being heard the ST 'read' it in light of justice to the appellant.

For further information please contact at S.S Rana & Co. email: info@ssrana.in or call at (+91- 11 4012 3000). Our website can be accessed at www.ssrana.in

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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