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High Court Appeal No.109 of 1981, decided on 9th April, 1987.

‑‑‑S.192‑‑Company being a separate legal entity from its shareholders, shareholders cannot lay any claim against any assets of the company while it is operating except against declared dividend‑‑Merely showing a particular sum in the account as reserved for dividend, does not give any cause of action to a shareholder to ask for the payment of any amount out of such um unless and until dividend is declared in the general meeting of the shareholders in accordance with law.

Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income‑tax, Bombay A I R 1955 S C 74; The Commissioner of Income‑tax, Punjab, N:W.F.P. and Bahawalpur v. Mrs. E.V. Miller (deceased) PLD 1959 SC (Pak.) 219; Dr. A. Lakshmanaswami Mudallar and others v. Life Insurance Corporation of India and another A I R 1963 S C 1185 and General Assurance Society Ltd. v. Life Insurance Corporation of India A I R 1964 S C 892 ref.

‑‑S.192‑‑Life Insurance (Nationalisation) Order (10 of 1972), Arts. 11 & 15‑‑Insurance Act (IV of 1938), Ss. 13, 49‑A & Sched. IV, Part I & 4‑‑Nationalisation of life Insurance business‑‑Nationalised company and State Life Insurance Corporation, at the time of nationalisation, as per agreement /arrangement, allocated a certain amount to the shareholder's account from surplus of the company‑‑Corporation failed in terms of agreement /arrangement between the corporation and nationalised company, to pass on the said amount to the Company for crediting in the shareholder's account‑‑Suit by Company‑‑Held, amount in question would have remained vested in the Company till the time the dividend would have been declared in the general meeting of the shareholders‑ Even unclaimed declared dividend remained vested in the Company‑ Company, therefore, had the locus standi to file the suit in case it could establish a binding agreement between itself and the corporation or a statutory obligation on the part of corporation‑‑Assumption that company was claiming amount of dividend though was not declared by the Corporation was not correct as dividend was to be declared by the Company and not by the Corporation‑‑If the Corporation was under obligation in terms of Art. 15 of the Life Insurance (Nationalisation) Order, 1972 or S.49‑A read with Sched. IV, Parts I & II of the Insurance Act, 1938 to pay the amount to the Company, then the Company's suit was competent.

Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income‑tax, Bombay A I R 1955 S C 74; The Commissioner of Income‑tax, Punjab, N.W.F.P. and Bahawalpur v. Mrs. E.V. Miller (deceased) P L D 1959 S C (Pak.) 219; Dr. A. Lakshmanaswami Mudaliar and others v. Life Insurance Corporation of India and another A I R 1963 S C 1185 and General Assurance Society Ltd. v. Life Insurance Corporation of India A I R 1964 S C 892 ref.

Muhammad Ali Sayeed for Appellant.

Mansoor Ahmad Khan for Respondent.

Date of hearing: 2nd April 1987.

‑‑This High Court Appeal is directed against the judgment/decree dated 19‑8‑1981 passed by learned Single Judge in Suit No.440 of 1974 dismissing the appellant's suit for the recovery of Rs.33,18,703 being the amount lying in the share‑holders account with the respondent with interest at the rate of 91 per cent per annum.

2. The brief facts of the case are that the appellant in a Public Limited Company which had its registered office in Peshawar and its Head Office at Karachi. Prior to 1‑11‑1972 the appellant was a composite Insurance Company and was carrying on life as well as general insurance business in Pakistan. On 20‑3‑1972 the President of Pakistan issued. The Life Insurance (Nationalisation) Order, 1972 (hereinafter referred to as the Order) for nationalisation of the life, insurance business in Pakistan. In pursuance of the Order the management of all insurers transacting life insurance business in so far as the management related to such business vested in the Federal Government of Pakistan with effect from 19‑3‑1972 with all the assets, liabilities and obligations etc. On the same day the Federal Government appointed Trustees for the management of the affairs of all insurers transacting life insurance business (hereinafter referred to as the LIMB). After that on 1‑11‑1972 the Federal Government constituted and established the State Life Corporation of Pakistan in exercise of the powers vested in it by Article 11 of the Order. It appears that under section 13 of the Insurance Act, 1938 (hereinafter referred to as the Act), every insurer carrying on life insurance business was obliged once at least in every three years to cause an investigation to be made by an actuary into the financial condition of the life insurance business carried on by it, including a valuation of its liabilities in respect thereto and was also obliged to cause an abstract of the report of such actuary to be made in accordance with the regulations contained in Part I of the Fourth Schedule and in conformity with the requirements of Part II of that Schedule to the Act. It further seems that under section 49‑A of the Act the profit on life insurance business was to be allocated for the benefit of the policy holders a sum not less than 90 or not more than 971 . Surplus was to be appropriated by the Company for the benefit of the shareholders. It is an admitted position that the triennial valuation of the life insurance business of the appellant for the years 1969, 1970 and 1971 was under preparation when the life insurance business was nationalised through the Order. Upon the completion of the investigation the actuary submitted his report which had indicated a surplus of Rs.3.73 crores. There was controversy as to the reserved amount for bad debts as to the figure between the appellant and the respondent, consequently the matter was referred to Messrs A.F. Ferguson & Co., Chartered Accountants, who suggested a figure of Rs.80 Lakh which was agreed to. It is the case of the appellant that the appellant's and the respondent's Chairman entered into an Agreement as to the disposal of the aforesaid surplus, whereby a sum of Rs.28,56,296 (hereinafter referred to as the amount), was allocated to the shareholders account from the aforesaid surplus after providing aforesaid provision for the bad debts. In pursuance of the aforesaid agreement the document under the caption Fourth Schedule was signed by the consulting actuary, Chairman, Managing Director and two Directors of the appellant and the Chairman of the respondent Corporation in pursuance of respondents Chairman's letter dated 10‑1‑1972 addressed to the then Managing Director Mr. R. A. Bhimjee Exh.4/2. It may be advantageous to reproduce hereinbelow paras. 6, 7 and 8 of the Fourth Schedule:----

"Appropriation of Surplus:

Surplus as shown in Form 'I' Rs.2,93,32,431

respecting total business.

Less: Sum carried forward in the

last valuation Rs. 7,69,466

Balance being profit arising during --------------------

the inter valuation period. Rs.2,85,62,965

--------------------

Among 94,117 policy holders with

immediate participation in

profits for total sum assured of Rs.2,63,79,176

Rs.1,12,48,80,965

To Shareholder's Account Rs. 28,56,296

Carried forward unappropriated Rs. 96,296

Bonus Rate:

The sum of Rs.2,63,79,176 as set out above for distribution to policy‑holders is the present value of simple reversionary bonuses for with profit policies which were in full force and entitled to share on the valuation date at the following rates:

Whole Life Assurances & Rs.33 per annum per

Whole Life Assurance Rs.1,000 sum assured.

with Limited Payments.

Endowment Assurances and others with profit policies:‑‑

(a) If term of policy is not Rs.10 per annum per

more than 15 years. Rs.1,000 sum assured.

(b) If term of policy is at Rs.16 per annum per

least 16 years but not Rs.1,000 sum assured.

more than 20 years.

(c) If term of policy is at Rs.24 per annum for

least 21 years. Rs.1,000 sum assured."

3. It is also the case of the appellant that since the respondent in terms of the above agreement/arrangement failed to pass on to them the amount for crediting in the shareholder's account they filed the aforesaid suit for the aforesaid sum plus Rs.4,62,407 on account of interest at the rate of 91% per annum from 12‑1‑1973 to 25‑9‑1974 thus, making a total sum of Rs.33,18,703 plus further interest and costs.

The above suit was resisted by the respondent on a number of legal and factual grounds. The learned Single Judge on the basis of the pleadings of the parties framed the following three issues:

"(1) Whether Annexure 'A' to the plaint creates any liability on the defendants

(2) Whether the amount claimed or any interest thereon is payable by the defendant to the plaintiffs

(3) What should the decree be "

The appellant in support of the case examined P. W.1 Nawab Hassan, Senior Executive Vice‑President of the appellant whereas respondent examined D.W.1 S.H.Z. Jafri, Assistant General Manager Accounts of the respondent‑Corporation, D.W. 2 Muhammad Farid working as the Assistant to the Chairman of the respondent‑Corporation at the relevant time and D.W.3 Zakria Jafri a Despatch Clerk. Both the parties also produced a number of documents. The learned Single Judge after hearing the parties by the judgment under appeal dismissed the suit by holding that the aforesaid sum of Rs.28,56,296 shown by the defendant in the shareholders Dividend Account continue to form part of the assets of the nationalised Insurance Company and until such time the dividend is declared by the defendant, the amount would not become a debt recoverable by the shareholder and, therefore, the suit by the plaintiff for the recovery of the said amount was not maintainable. The appellant being aggrieved by the above judgment/decree has filed the present appeal.

4. In support of the above appeal Mr. Muhammad Ali Sayeed, learned counsel for the appellant has vehemently urged as follows:‑---

(1) That the learned Single Judge erred in not appreciating that the dividend was not to be declared by the respondent but was to be declared by the appellant on receipt of the above amount from the respondent as the share capital of the appellant Company was not nationalised.

(2) That since the amount is the share of the shareholders for the period prior to 31‑12‑1971, the same did not vest in the LIMB or in the respondent.

(3) That Exh.4/2 is a binding agreement between the appellant and the respondent.

(4) That under the provisions of the Order, the respondents were obliged to discharge all the liabilities and obligations and, therefore, the appellants aforesaid suit was competent.

5. On the other hand Mr. Mansoor Ahmad Khan learned counsel for the respondent has contended as follows:‑-

(1) That the appellants suit has been rightly dismissed as the appellant could not have sued for the shareholders share till the declaration of dividend.

(2) That upon the nationalisation on 19‑3‑1972 all the assets and liabilities stood vested first in the LIMB and then in the respondent including the amount though it related to the period expiring on 31‑12‑1971.

(3) That Exh. 4/2 cannot be enforced as;---

(i) it is not an agreement but a schedule which was filed for discharging statutory requirement of the Act.

(ii) the agreement is ultra vires of the powers of the respondents Chairman.

(iii) that it is not re‑enforceable being without consideration.

(iv) That in terms of the Order the respondents were not obliged to pass on the amount to the appellant.

6. Adverting to the aforesaid first submission of the learned counsel, for the parties, it may be advantageous to reproduce the last para of the judgment of the learned Single Judge, which reads as follows:‑--------

"The result of the above discussion is that in spite of showing the sum of Rs.28,58,296 by the defendant in the Shareholder's Dividend Account it continue to form part of the assets of the nationalised Insurance Company and until such time the dividend is declared by the defendant the amount will not become a debt recoverable by the shareholder and as such the present suit by the plaintiff for the recovery of the amount is not maintainable. As the defendant has succeeded on a technical ground there will be no order as to costs."

7. From the reading of the above‑quoted para. it is evident that the learned Single Judge was of the view that the suit was not maintainable as the dividend was not declared by the defendant for the shareholders. This conclusion apparently is based on the assumption that the respondent had acquired the shares-holding of the appellant Company which is not the correct position. It may again be pointed out that under the Order the life insurance business was nationalised and. all the assets, liabilities and obligation in respect thereof were vested in the LIMB then in the respondent corporation. The appellant continued to operate as an Insurance Company with the modification in the object, that is, it ceased to have any life insurance business. Factually there was no capital of the life insurance business which could have been vested in the respondent‑Corporation.

Mr. Mansoor Ahmad Khan has referred to the following cases; in support of the judgment:

(i) Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income‑tax Bombay A I R 1955 S C 74 in which the Indian Supreme Court while inter alia construing section 192 of the Companies Act, 1913 held that a shareholder in a Company acquires a right to participate in the profits of the company but he does not acquire any interest in the assets of the Company, and, therefore, he has got no right in the property of the Company.

(ii) The Commissioner of Income‑tax, Punjab, N.‑W.F.P. and Bahawalpur v. Mrs. E.V. Miller P L D 1959 S C (Pak.) 219. In the above case the controversy before the Honourable Supreme Court of Pakistan was, whether the assessee was obliged to declare the dividend declared by the Company out of its agricultural income and received by him as a part of his income for the purpose of income‑Tax liability though the agricultural income was exempted under section 4(3)(viii) of the Income‑tax Act. While answering the above controversy in the negative, the Hon'ble Court held that the income which is agricultural income in the hands of a joint stock company does not cease to be agricultural income when it is distributed to the shareholders by way of dividend. In the judgment Munir, C.J. also made the following observations which are pertinent to the point in issue and read as follows:‑-----

"The Constituents of a Company are its shareholders because its promoters must subscribe to its shares in order to bring it into existence. The company has a memorandum of association which controls its business activity. For the management of its affairs it has its own articles of association and a board of directors. The assets of the Company are owned by it and not by its shareholders but the Company is constituted for the purpose of earning profits and the shareholders are not only entitled to a ratable distribution of its assets on its being wound up, but also indirectly control the management of the Company by appointing the directors. Thus, the shareholders have ultimate control over the management of the Company, though they do not directly manage its affairs. It is true that the directors derive their authority from the law, but as their own appointment rests with the shareholders, they are, in substance, the agents or delegates of the general body of the share‑holders. What is of the vital importance, however, is that a Company is brought into existence and exists for the sole purpose of earning profits and gains and it earns them not for itself but for the benefit of the shareholders. To earn profits for its shareholders being the raison deter of the Company, a Company would be defeating the object of its own existence if Croesus‑like it filled its coffers with gold and did not distribute it as dividends to its shareholders. A company cannot enjoy its own income, the ultimate beneficiaries of the income being the shareholders themselves who, on the recommendation of the directors declare the dividends."

(iii) Dr. A. Lakshmanaswami Mudaliar and others v. Life Insurance Corporation of India and another A I R 1963 S C 1185 in which the facts were that the shareholders resolved on 15‑7‑1955 in an extraordinary general meeting of shareholders to donate Rs.2 Lakh to a trust out of the Share‑holders Dividend Account though no dividend was declared in the said meeting or earlier in respect of the said account. The above sum was paid. Upon the nationalisation of the life insurance in India in 1956, the Corporation called upon the Trustees to refund the aforesaid amount of Rs.2 Lakh which demand was upheld by the Supreme Court of India. While concluding the same, it was observed that in the shareholders dividend account the policy‑holders have no interest but until dividend is declared the shareholders do not become creditors of the Company for a fractional share in the fund proportionate to their shareholdings. It was also held that the act of donating Rs.2 Lakh was ultra vires. The trustees acquired no right to the aforesaid sum and it continued to remain vested in the Company and thereafter upon nationalisation, it vested in the Corporation.

(iv) General Assurance Society Ltd. v. Life Insurance Corporation of India A I R 1964 S C 892, in which the Indian Supreme Court held that even if the dividend is declared, the amount remained vested in the Company but the shareholders become a creditor to claim the same and, therefore, unclaimed declared dividend stood vested in the Indian Life Insurance Corporation upon nationalisation of the life Insurance business in view of section 7 of the Life Insurance Corporation Act, 1956.

8. There cannot be any cavil to the propositions of law propounded in the above‑cited judgments. It is a well‑settled principle of law that a Company is a separate legal entity from its shareholders and that they cannot lay any claim against any assets of the Company while it is operating except against the declared dividend. It is equally a well‑settled principle of law that merely showing a particular sum in the account as reserved for dividend, does not give any cause of action to a shareholder to ask for the payment of any amount out of the aforesaid sum unless and until the dividend is declared in the general meeting of the shareholders in accordance with law. However, in our view, the above‑cited cases have no direct bearing to the point in issue. The suit was not filed by the shareholders for the recovery of the amount allocated for payment to them. The suit was filed by the company on the basis of the alleged agreement entered into between the appellant and the respondent. Some of the judgments referred to hereinabove factually lend support to the appellant's case as, to the locus standi, for example, in the above‑cited case of 1964 Indian supreme Court it was held that even unclaimed declared dividend remained vested in the Company; whereas in the aforesaid Supreme Court of Pakistan's case of 1959 it was held that the assets of the Company are owned by it and not by its shareholders though it has been constituted for the purpose of earning profits and its distribution among the shareholders. In the instant case the amount would have remained vested in the appellant‑Company till the time the dividend would have been declared in the general meeting of the shareholders. We are, therefore, of the view that the appellant has the locus standi to file the suit in case it can establish a binding agreement between itself and the respondent or a statutory obligation on the part of the respondent. The assumption that the appellant was claiming amount of dividend though was not declared by the respondent is not correct. The dividend was to be declared by the appellant and not by the respondent.

9. As regards Mr. Muhammad Ali Sayeed's contention that the amount relates to the period expiring on 31‑12‑1971, and, therefore, the same had not vested /transferred to the LIMB in March 1972 or to the respondent in November 1972, it may be observed that we are unable to subscribe to the above submission. The amount was part of the assets of the life insurance business and, therefore, stood vested in the LIMB and thereafter in the respondent‑Corporation. The ratio of above 1964 Indian Supreme Court case is very much attracted to the controversy in issue, wherein it was held that even unclaimed declared dividend remained vested in the Company. The submission of Mr. Mansoor Ahmad Khan in this regard seems to be in consonance with Article 15 of the Order, which contemplates vesting of all assets and liabilities etc. appertaining to life insurance business in Pakistan.

10. Reverting to Mr. Muhammad Ali Sayeed's submission that Exh.4/2 constitutes a binding agreement, it may be observed that he has referred to the aforesaid Exh.4/2, which has been signed as pointed out hereinabove by the appellant's Chairman, Managing Director, whereas on behalf of the respondent by its Chairman Exhs. 4/4 and 4/5 are the letters written by the appellant's Managing Director with reference to above Exh.4/2 requesting for the payment of the amount. Exh.4/6 is a letter addressed by the Assistant to the Chairman on 14‑5‑1974 to the appellant's Mr. Roshan Ali Bhimjee in which it is stated that the matter was referred to the Government for their instructions. He has also referred to Exh.4/7 which is the 40th Annual Report of the appellants Company pertaining to 1972 expiring on 31‑12‑1972 in which at page 13 the amount has been shown in the credit column. On the other hand Mr.Mansoor Ahmad Khan has referred to Exh.4/14 which is an alleged letter written by Mr. Beg, respondents Chairman to hr. Bhimjee the appellant's Managing Director denying any alleged understanding referred to in appellant's letter dated 11‑5‑1973 Exh.4/4. This letter has been denied by the appellant. Be that as it may, Mr. Mansoor Ahmad Khan has also referred to Exh.5/1 which is the Annual Report of 1974 expiring on 31‑12‑1974 of the respondent‑Corporation in which at page 40 the amount under para. 4(b) has been shown as follows:

"Claim other than claims on policies totalling Rs.28,56,296 having not been acknowledged by the Corporation as debt."

Mr. Muhammad Ali Sayeed has referred to the case of Bengal Silk Mills Co., v. Ismail Golam Hossain Ariff reported in A I R 1962 Cal. 115, in which a Division Bench of the Calcutta High Court held that for the purpose of section 19 of the Limitation Act amount shown in the balance sheet under liabilities as debt by the defendant Company to the plaintiff which was duly signed by the Managing Agent constituted an acknowledgement for the purpose of the above section for limitation.

We are not inclined to give any finding on the question, whether the documents on record constituted a binding agreement between the appellant and the respondent as to be enforceable in the Court of law as we are inclined to remand case for the reason that the learned Single Judge has not touched upon this aspect in the judgment but has not suited the appellant on a ground which in our view was not involved in the present case and which has already been referred to hereinabove. If the respondents are under obligation in terms of Article 15 of the Order to pay the amount either by virtue of Exh.4/2 read with other correspondence and/or by virtue of inter alia section 49‑A of the Act read with Schedule 4 Parts I and II thereof, the appellant's suit was competent.

11. We, therefore, allow the appeal and set aside the judgment and decree under appeal and remand the case. The learned Single Judge will decide the above question in the light of the above discussion. However therefore will be no order as to costs.

Before parting with the above discussion, we may observe that under section 39 of the Order, the compensation was payable by the respondent to the insurers whose life insurance business was nationalised. The learned Single Judge may examine this aspect and may ascertain, whether the appellant has been paid any compensation inter alia in respect of the claim in question.

The parties with the permission of the Court may produce further evidence in support of their respective contentions.

M.B.A./E‑2/K Appeal allowed.

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