Komal Textiles And Printing Industries vs NATIONAL INSURANCE COMPANY LTD.

IT is the case of the Complainant/Appellant that it is a partnership firm engaged in printing all types of clothes and was having its principal place of business at Village Nimbri, Sonali Road, Panipat, Haryana. The Complainant firm was having its own building, machinery and other raw materials including stock of cloth. The machinery and building of the firm was financed by the Haryana State Financial Corporation (hereinafter referred to as the Financial Corporation). As per the requirements of the Financial Corporation the firm was required to get the machinery and building insured fully with the Insurance Company.

IT is the case of the Complainant that the Complainant was having three insurance policies from the Respondent Insurance Company. However, at the request and suggestion of the agent of M/s. National Insurance Company Ltd. (hereinafter referred to as the Insurance Company), the policies were consolidated on 24th September, 1992 and cover notes bearing numbers 397864, 837832 were issued, covering the risk from 24.9.1992 to 23.9.1993. Again on 28th September, 1992 a policy for enhanced value of the cloth for the stock was taken for which cover note bearing No. 397886 was issued. It is pointed out that on 24.9.1992 the Financial Corporation without issuing any notice took possession of the building and machinery and the entire stock was kept in the watch and ward of M/s. Universal Security Agency, New Delhi. Unfortunately, on 30th September, 1992 at about 11.45 pm fire broke out in the premises. The fire was controlled with the help of fire tenders. However, it caused extensive damage to the stock, machinery and building. The incident was reported to the Police by the Watchman of the Security Agency and the partners of the Appellant. Information was also given to the State Financial Corporation as well as the Insurance Company. The Insurance Company appointed M/s. V.K.Kharbanda and Associates, Surveyor, on 3.10.1992. They visited the factory premises on 5.10.1992 accompanied by the officials of the Haryana State Financial Corporation, to assess the loss caused to the Complainant on the basis of the claim made by the Appellant. They submitted their report on 25.3.1993. The Complainant claimed Rs.29,80,644/-. As against this, the Surveyors, M/s.V.K.Kharbanda & Associates, assessed the loss at Rs.18,64,594/-. It is pointed out that the Surveyors took consent of the Complainant for the said amount and took his signature on a voucher for full and final settlement of the claim at the said amount, even though the Complainant was not willing to settle it at the said amount. As the claim was not settled, after issuing notice to the Insurance Company, Original Complaint No. 20 of 1994 was filed before the State Consumer Disputes Redressal Commission, Haryana at Chandigarh. By order dated 26th February, 1998 the State Commission dismissed the said complaint. Hence, this appeal.

AT the time of hearing of this appeal, it was contended by the learned Counsel, Mr.S.K.Pattjoshi appearing on behalf of the Complainant that the impugned order was passed by the State Commission without considering the facts in proper perspective. It is his submission that the Complainant was having insurance policies all throughout. However, a consolidated policy was to be given and for that the Complainant paid the differential amount of premium on 24.9.1994. For that, cover notes were issued as stated above. He further submitted that the finding recorded by the State Commission that the Complainant was not having any insurable interest on 24th September, 1992, is on the face of it, illegal and erroneous. Because, mere taking of the possession of the premises by the Financial Corporation, would not mean that the Complainant is completely divested of his interest in the reports. He further submitted that there is no justifiable reason to arrive at the conclusion that the Complainant has taken the insurance policy after the possession of the premises was taken over by the Financial Corporation. In any case, the onus to establish that there was non-disclosure by the insured that possession of the premises was taken over by the Financial Corporation before taking the cover notes was on the Insurance Company and the Insurance Company has not led any evidence to establish the said contention nor they have examined the concerned officers who had issued the cover notes.

IN our view, the submissions made by the learned Counsel for the Complainant require to be accepted. Firstly, it is to be stated that the Insurance Company was given time to produce the previous policies. For reasons best known to them, they have failed to produce the same by stating that records are not traceable. Further, there is nothing on record to establish that the Complainant was knowing that the Financial Corporation would take possession on the said date under Sec.29 of the Financial Corporation Act. On the contrary, there is evidence on record to establish that no notice was given to the Complainant before taking the possession. It is also to be stated that even though the building and the machinery were hypothecated to the Financial Corporation, it took possession of the entire premises including the stock lying therein and locked the factory. For this purpose, we would refer to the evidence which is led by the Insurance Company by examining Anil Arora, Assistant General Manager of the Haryana State Financial Corporation. In the Cross-examination he has admitted that at the time of taking over the possession of the factory, only the inventory of the machinery had been prepared and not that of other stocks, i.e. raw material and chemicals. But he stated that he had seen some stocks of raw material lying there. He further stated that when he reached the factory premises for taking over the possession, the factory was in working condition. He has also admitted that the Haryana State Financial Corporation has not served any written advanced notice except the notice under Section 29 on 6th May, 1992. From this evidence, it is clear that before taking over the possession on 24th September, 1992 no notice was given to the Complainant; at the relevant time, factory was in working condition; inventory of the stock lying there was not prepared; and, that he has seen some stocks of raw material lying there. Further, it is contended by the Complainant that the Complainant was having 3 or 4 policies and the policies were in existence on the date when the joint cover note was issued by the officers of the Insurance Company. For this purpose, we have given repeated adjournments to the Insurance Company. But, the Insurance Company has not led any evidence of any concerned insurance officers who have issued the cover-notes to establish as to "when did they issue the cover notes" and "in what circumstances did they issue the cover notes". Therefore, there is no evidence to disbelieve the say of the Complainant that the cover note was issued by the officers of the Insurance Company so as to amalgamate all the previous existing policies and that too prior to taking over possession of the Haryana State Financial Corporation. Further, Charging of differential amount of premium would also establish that the insurance cover was subsisting and thereafter during that period joint insurance cover was given to the Complainant.

SECONDLY , even if we presume that the cover notes were obtained by the Complainant after the possession of the premises was taken over by the Financial Corporation, it would not mean that the insured was not having insurable interest over the property. That would be clear from the provisions of Section 29 of the State Financial Corporations Act, 1951. Section 29 does not vest ownership in the State Financial Corporation. The State Financial Corporation or its officers are trustees for administration of the property of which possession is taken because of non-payment of loan. Even after auctioning the property the State Financial Corporation is required to return the surplus to the Complainant after adjusting the loan account. Section 29 reads thus: "29. Rights of Financial Corporation in case of default." (1) where any industrial concern, which is under a liability to the Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any instalment thereof (or in meeting its obligation in relation to any guarantee given by the Corporation) or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the Financial Corporation shall have the (right to take over the management or possession or both of the industrial concern), as well as the (right to transfer by way of lease or sale) and realize the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation. (2) Any transfer of property made by the Financial Corporation, in exercise of its powers under sub-section (1), shall vest in the transferee all rights in or to the property transferred (as if the transfer) had been made by the owner of the property. (3) The Financial Corporation shall have the same rights and powers with respect to goods manufactured or produced wholly or partly from goods forming part of the security held by it as it had with respect to the original goods. (4) Where any action has been taken against an industrial concern under the provisions of sub-section (1), all costs, (charges and expenses which in the opinion of the Financial Corporation have been properly incurred) by it (as incidental thereto) shall, in the absence of any contract to the contrary, be held by it in trust to be applied firstly, in payment of such costs, charges and expenses and, secondly, in discharge of the debt due to the Financial Corporation, and the residue of the money so received shall be paid to the person entitled thereto.) (5) (Where the Financial Corporation has taken any action against an industrial concern) under the provisions of sub-section (1), the Financial Corporation shall be deemed to be the owner of such concern, for the purposes of suits by or against the concern, and shall sue and be sued in the name of (the concern).

The aforesaid Section empowers the Financial Corporation to take possession of the property in case where there is default in repaying loan by a debtor. It empowers not only to take possession but also to sell the property on behalf of the owner of the industrial concern. Further, even if the property is sold the amount is to be utilised for discharge of the debt due to the Financial Corporation and residue of the money is to be paid to the person entitled thereon, i.e. the owner of the industrial concern. The owner of the industrial concern remains to be the owner and his title of the property is not divested.

FINALLY , sub-section (5) makes it clear that the Corporation is deemed to be the owners of such industrial concern for the limited purposes of suits by or against the concern. But, entire ownership does not vest in the Corporation merely because it takes over possession of the industrial concern. This is made clear by the Apex Court in the case of Mahesh Chandra V. Regional Manager, U.P. Financial Corporation (1993) 2 SCC 279, at page 294 the Court has made the position clear by holding that: "15... Endeavour should be to adjust and accommodate as business considerations require the unit to function for benefit, both, of the general public and the Corporation. It is not mandatory, as a matter of law, to observe the process of taking over strictly. But if there is no option left and the unit is taken over then its transfer requires not only sincere effort but to act reasonably and fairly. 16. Equally sub-section (4) of Section 29 treated the corporation to be a trustee of the debtor or person claiming title through him. It saddles the Corporation or the officer concerned with inbuilt duties, responsibilities and obligations towards the debtor in dealing with the property and entails him to act as a prudent and reasonable man standing in the shoes of the owner. ""..

Therefore, when the property of the debtor stands transferred to the Corporation for management or possession thereof which includes right to sell or further mortgage etc., the Corporation or its officers or employees stand in the shoes of the debtor as trustee and the property cestui que trust." This would clearly mean that ownership of the property of the industrial concern does not vest in the Corporation. Limited right is conferred on the Corporation for recovering its debt, and even while recovering the debt, the Corporation has to act as a trustee of the owner. Further, the Delhi High Court in M/s. Disco Electronics Ltd. (In Liquidation) case, inter alia observed. "28. In my view, in the taking over of the possession under Section 29 of the State Financial Corporation Act, the owner always retains the right of ownership of the property does not pass on to the financial corporation, but it is only for certain purposes of affecting recovery of its dues by the sale and to remove any impediments in their way that the statute by a deeming provision has granted to the financial corporation powers of the owner for the limited purpose of realizing the security, to convey good marketable title to the purchaser, and to defend any legal action, but the property does not absolutely vest in it."

SIMILARLY , the Division Bench of the Patna High Court in Bihar State Financial Corporation Vs. Jute mill Mazdoor Sabha, Katihar and Ors. (1995 Lab IC 801 (803) (DB) (Pat), considered the provisions of Section 29 and held that the purpose behind taking over management or possession or both of the industrial concern by the Corporation is to secure and realize loan advanced to it, but Financial Corporation cannot be treated as owner. The relevant discussion is as under: "14. In the instant case, the deeming provision has been introduced only for limited purpose of a suit being filed by or against the Industrial Undertaking in question. Therefore, the concept of ownership introduced under Section 29(5) of the said Act must be a limited one as is intended by the legislative mandate. Having regard to the legislative mandate under Section 29(5) of the said Act, we hold that the said Corporation cannot be treated as the owner of the said Mill. Here we respectfully differ from the learned Judge of the first Court. It appears clearly from the provisions of the said Act, particularly Section 29 of the said Act that the purpose behind taking over management or possession or both of the Industrial concern by the said Corporation is to secure and realize the loan advanced to it. The said taking over of either management or the possession is not for the purpose of running the industrial concern nor is such take over intended for the purpose of allowing the said Corporation to step into the shoes of the owner of the said industrial undertaking."

IN view of the aforesaid discussion, the insured continues to be the owner of the property and retains insurable interest in the same. Hence, it is not possible to accept the contention of the learned Counsel Mr. Wadhwa for the Insurance Company that the Complainant was not having insurable interest in the property on 24.9.1992, i.e. the date on which the Corporation took over possession of the factory premises. On the contrary, for protecting his property he was required to take insurance cover as per the terms of the loan agreement entered into between him and the Financial Corporation. The learned Counsel Mr.Wahdwa next submitted that the Complainant has suppressed the material fact that the possession of the factory was taken over by the Financial Corporation at the time of taking the cover notes. It is the fundamental principle of insurance law that there should be utmost good faith and that utmost good faith must be observed by the insured. As the insured has not disclosed that the Financial Corporation has taken over possession of the premises, before taking insurance cover, the contract is void due to suppression of material fact. For this purpose, he has relied upon the decision rendered by the Apex Court in M/s. Modern Insulators Ltd. Vs. Oriental Insurance Co. Ltd., (2000) 2 SCC 734. In our view, in that decision the Court has specifically held as under: "8. It is the fundamental principle of insurance law that utmost good faith must be observed by the contracting parties and good faith forbids either party from non-disclosure of the facts which the parties know. The insured has a duty to disclose and similarly it is the duty of the Insurance Company and its agents to disclose all material facts in their knowledge since obligation of good faith applies to both equally".

In our view, there is nothing on record to establish that the insured has suppressed any material fact. Firstly, the insured was not knowing that his industrial concern was taken over by the Financial Corporation. On record, there is a statement by the officers of the Haryana State Financial Corporation that notice was not issued prior to taking of the possession. There is nothing on record to establish that possession of the premises was taken over prior to issuance of the cover note. The Insurance Company has not led any evidence on this point for reasons best known to them, despite various opportunities given to them. We have to state that on 22nd September, 2006 this Commission has directed the Insurance Company to produce on record copies of the previous policies on the basis of which consolidated policy was issued in favour of the Complainant. For this purpose, sufficient time was given to the insurance. Thereafter, on 18.11.2006 an order was passed to the effect that the Insurance Company shall not suppress but produce the relevant consolidated policy which was issued in favour of the Complainant on 24th September, 1992 in favour of the Complainant. Therefore, the contention of the learned Counsel for the Insurance Company that the Complainant has committed fraud for obtaining insurance cover on 24th is without any substance and basis. We have to observe that the concept of good faith is applicable to the Insurance Company also. Because, in the present case, despite the direction previous policies are not produced on record. Further, in spite of the fact that the survey report as well as the investigator"s report which are in favour of the Complainant, the insured is harassed for years together.

THEREFORE , the contention of the Insurance Company that the Complainant was not having any insurable interest at the time of taking the policy is without any substance and repudiation of the claim on this ground is wholly unjustified. Now, the next question is with regard to the quantum. In the present case the Complainant has claimed a sum of Rs.29,80,644/-. The insurance has appointed V.K.Kharbanda and Associates. They submitted their survey report on 25.3.1993. After verifying the original records, the Surveyor has assessed the loss at Rs.18,64,594/-. The relevant portion of the discussion by the Surveyor is at length, but we would only refer to the relevant portion, assessing the loss, which is as under: "As per their report the insurance cover was for: "Building 14,00,000.00 Machinery and accessories/tools including tables, frames, screens, tracing paper, designs 10,00,000.00 Stock and stock in process of bed sheets, curtain clothes, H/L Durries, placements and other H/L durries and other H/L goods held in trust 6,00,000.00 Stock of kerosene oil, M.T. oil, drums paints, colours and chemicals used in textile and printing industry 1,50,000.00

ON a perusal of the Cover Note No. 397864 it is observed that the wording of cover on stock reads as under: - "Stock of bed sheets, curtain clothes, H/L daries, placements, tablemats and other H/L products Including goods held in trust or commission for printing". This inter alia means that stock of cloth of Insured as well as out side parties in trust or commission is insured for Rs. 6,00,000.00 (2) Cover Note No. 397866 operative from 28.9.92 to 27.9.93 covering stock of H/L daries, bed sheets, curtain clothes and other H/L goods including goods held in trust r commission whilst kept/lying or stored at the above said address for Rs. 5,00,000.00".

It is to be stated that the Surveyor visited the premises on 5.10.1992, accompanied by the officials of the Haryana State Financial Corporation who had locked the factory. They visited again on 22.11.1992 for verification of the accounts of various parties who had sent their goods to the insured plant for printing. And, thereafter, finally discussed the claim with them during the visit to Panipat on 15.2.1993. According to them, cause of damage was most probably electric sparking or short-circuit. In any case, the cause of fire was accidental. Thereafter, they have discussed in detail the damages caused to the building, stock of clothes, stock of chemicals in plastic containers as well as the claim made by the Complainant. After a detailed discussion, they have assessed the loss as under: "ADJUSTMENT OF LOSS UNDER THE TWO COVERS: Policy No. Cover Note No. 420502/3101529 397866 Loss of Building 2,36,984.20 - Loss of Machinery 4,41,728.00 - Loss of stock of clothes 10,64,664 x 6/11 5,80,725.76 4,83,938.18 Loss of Stock of Chemicals, buckets and mugs 1,23,618.00 - ___________ ___________ 13,83,056.96 4,83,938.18 Add: Proportionate Fire fighting expenses 2,243.84 356.16 _________ ___________ 13,85,299.80 4,84,294.34 Excess Clause 2,500.00 2,500.00 __________ ___________ 13,82,799.80 4,81,794.34 Say: Rs. 13,82,800.00 4,81,794.00 Hence, for both the cover-notes, the total comes to " Rs. 13,82,800.00 Rs. 4,81,794.00 _____________ Total : Rs. 18,64,594.00" =============

THEREAFTER , the Insurance Company appointed M/s. G.S. Narang and Co., Investigators on 12.9.1994 who also submitted report on 14.2.1995, i.e. after a lapse of more than 2 years of the occurrence of fire. After a detailed discussion he also arrived at the conclusion that the claim of the Complainant appears to be payable. The relevant observations are as under: "Observations: From the foregoing it is observed. (a) The insured factory was locked up by HFC on 24.09.92. (b) The insured was not allowed to remove materials/goods from the factory. (c) The factory was working at the time of lock up. (d) The factory caught fire on 30.09.92. (e) The fire is accidental but actual cause is not known. It can safely be assumed to be a case of short circuit. (f) The accounts submitted by the insured cannot be relied upon since they are prepared by the C.A. on the basis of Katcha papers submitted by the insured to him. (g) The rejections have been taken into account only after the fire although they relate to the period earlier than the lock up. There are no records with the insured to show that the rejected material was not disposed off prior to lock up. Therefore the rejections deserve to be disallowed. (h) The insured has not been able to given any definite accounts of returns after carrying out the job work although it is stated by him and his supervisor that they had been returning the goods regularly and sometimes fully and sometimes by parts. Therefore some reduction on this account is justified. (i) The claim otherwise appears to be genuine. 1. The claim appears payable. 2. The rejected good deserve to be disallowed. 3. Reduction of 10% of stocks allowed to cover the return of goods, for which no account is available, is justified."

At this stage we would mention that the Complainant has produced on record an internal note wherein also there is a recommendation by the Assistant Administrative Officer and Administrative Officer to pay a particular sum to the Complainant. We may not rely upon it, because we are relying upon the Surveyors" report.

IN the result, for the reasons stated above, we hold that mere taking over possession of the factory premises or industrial concern by the State Financial Corporation in exercise of its power under Section 29 of the Financial Corporation Act, ownership or title over the property is not divested. The possession or the management of the industrial concern is taken over only for recovering the debt. Even if the property is sold, after recovering the debt, the residue is required to be returned to the owner. Hence, the ownership of the industrial concern remains to be that of the owner and the Corporation or their officers are required to act as trustees for the industrial concern. The Corporation or its officers or employees stand in the shoes of the debtor as trustee and insurable interest in the property would continue with the owner. In our view, as the claim is repudiated solely on the ground that the insured was not having insurable interest in property, which is, as stated above, erroneous, we hold that the repudiation of the claim is unjustified and hence, the Insurance Company is required to reimburse the Complainant on the basis of the loss assessed by the Surveyor, namely, Rs.18,64,594/-. The complaint is allowed. The impugned order passed by the State Commission is set aside. The Insurance Company is directed to reimburse the Complainant the sum of Rs.18,64,594/- with interest at the rate of 12% p.a. from 1st April, 1993, i.e. after six months from the date of fire incident. The Insurance Company shall also pay Rs.25,000/- as costs to the Complainant.