Enforceability of Minority Shareholder Rights under Shareholders Agreement

This is with reference to the article in the ET dated 2nd Dec, 2010. Reference was made to the decision of the CLB in Jindial Vijayangar Steel to put forth the position of CLB that clauses of JV or Shareholders Agreement which provide for consensus or other rights of minority shareholders would be void when inserted in the Articles by way of amendment since these clauses run contrary to the spirit of Company Law (Section 9).

Since the existing company law cases have set a precedent that a company is not bound by shareholders Agreement to which it is a party (it need not be, but sometimes it could be made a party along with the shareholders) if the Agreement requires the company to do or not to do actions which run against the Articles and the company law provisions.  Moreover, Articles are the constitutionary documents under law which alone can mandate the company on certain affairs.  In this context, it is necessary to understand the concept of waiver of private rights by way of contracting out such rights.            

The SC in Shri Lachoo Mal Vs.Shri Radhey Shyam AIR1971SC2213 explained the law on this subject by referring to Halsbury’s Laws of England as follows:

In Halsbury’s Laws of England, Volume 8, Third Edition, it is stated in paragraph 248 at page 143 :

As a general rule, any person can enter into a binding contract to waive the benefits conferred upon him by an Act of Parliament, or, as it is said, can contract himself out of the Act, unless it can be shown that such an agreement is in the circumstances of the particular case contrary to public policy. Statutory conditions may, however, be imposed in such terms that they cannot be waived by agreement, and, in certain circumstances, the legislature has expressly provided that any such agreement shall be void.

In paragraph 6 of the judgment the SC explains the above position as follows

“The general principle is that every one has a right to waive and to agree to waive the advantage of a law or rule made solely for the benefit and protection of the individual in his private capacity which may be dispensed with without infringing any public right or public policy.

Thus the maxim which sanction the nonobservance of die statutory provision is cuilibet licat renuntiare juri pro se introducta. (See Maxwell on Interpretation of Sta tutes, Eleventh Edition, pages 375 & 376.) If “there is any express prohibition against contracting out of a statute in it then no question can arise of any one entering into a contract which is so prohibited but where there is no such prohibition it will have to be seen whether an Act is intended to have a more extensive operation as a matter of public policy.

In your article you have stated the violation of shareholder’s statutory rights under the law if the consensus clauses are incorporated in the Articles in matters over which company law requires decisions by simple majority or special majority (basically these are provisions imposing additional threshold limits over and above the required majority under law on certain issues).

Can it be said that additional threshold violates rights of the shareholders under the company law?

Let us see the effect of the clauses in shareholder’s agreement and in Articles of the company.

A majority shareholder who agrees under the shareholder’s Agreement not to vote in favour of some issue unless the minority shareholder expresses his consent in favour of the issue is waiving away his statutory right willingly. It is perfectly valid in law to waive away such private right unless it is proved that such waiver is against the public policy or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent (Section 23 of the Indian Contract Act, 1872).  Here court had explained the meaning of “to defeat the provisions of law” as follows:

What makes an agreement, which is otherwise legal, void is that its performance is impossible except by disobedience of law. Clearly no question of illegality can arise unless the performance of the unlawful act was necessarily the effect of an agreement.”

The shareholder’s Agreement in effect requires additional majority than that is prescribed by law. If the law requires 51% majority the Agreement might require 99% majority. These clauses are not contrary to what is prescribed under law but are only additional thresholds limits agreed by the shareholders (including the majority). As long as the Agreement is not prescribing lesser percentage like 45% it is not against the law. Even if the contention is the violation of majority shareholder rights, it is voluntary waiver of his rights which is not prohibited in company law or any other law.                                                             

In the event of insertion of these consensus clauses in the Articles of Association, it is binding on the company legally (as opposed to contractual obligation). But will such clauses run contrary to the spirit of company law and therefore overruled by company law sections as held by the CLB? Can it be called a contradiction of law if the Articles require 75% majority and the law requires at least 51% majority?

Exclusive Jurisdction of Electricity commission and Arbitration

In recent times, the ubiquitous  arbitration clause in Power Purchase Agreements  has lost relevance or rather it seems to have no legal consequence in light of two important Judgments in the case of Gujarat Urja Vikas and another in GMR Power Corporation  (TNERC’s order).

 

Section 174 and section 175 of the Indian electricity Act, 2003 as interpreted  in  Gujarat Urja Vikas Nigam Limited Vs Essar Power Limited, 2008 (4) SCC 755 mean  Indian Electricity Act, 2003 (being special Act) overrides any general enactments wherever there is contradiction or inconsistency between the provisions of the two Acts.

However, based on SC decision in Gujarat Urja Vikas it can only be said that Indian Electricity Act overrules Arbitration and conciliation Act, 2003 where there is some inconsistency between the provisions either expressly or indirectly. In other circumstances, the general Act (Arbitration and Conciliation Act, 2003) shall apply as usual to all proceedings before an arbitrator. The above case held that Sec 11 of Arbitration Act has been overruled by Section 86(1)(f) of the Electricity Act in so far as the former provides for appointment of arbitrator by the Chief Justice of High court or Supreme Court whereas the latter provides for  appointment of Arbitrator by the Commission with respect to all disputes between the generator and a licensee.

Nowhere the Judgment holds that Arbitration and Conciliation Act does not apply to proceedings before an arbitrator.

Jurisdiction and Arbitration

In ordinary civil proceeding before a Court one of the pleas available to the defendant is to claim existence of arbitration Agreement to resolve the dispute which is a fact in issue in the suit before the court. In such a case, the existence of such Arbitration Agreement or clause acts as bar on the jurisdiction of the civil court to further entertain the suit.

The SC while interpreting Section 86(1)(f) of the Indian Electricity Act, 2003 had held that  “only commission shall have the jurisdiction to hear the disputes between a licensee and a generator by itself  and it alone may refer the dispute to the Arbitrator”.

Although the Indian Electricity Act bars jurisdiction of civil courts but it is only in matter of certain specific types of matters and not all kinds of matters under the Act.  The above judgment of the SC may be interpreted to mean (since SC held commission alone shall have the jurisdiction to adjudicate disputes between generator and Licensee under the Electricity Act) implied prohibition on the jurisdiction of Civil Courts (please read section 9 of the civil procedure code.)

However, the Act nowhere prohibits Arbitration of disputes between various parties under the Act.  It merely limits the scope of appointment of arbitrator to the one chosen by the Commission.  In fact, the judgment in Gujarat Urja Vikas is all about appointment of arbitrator by Parties to PPA (or by judge under Sec 11 of the Arbitration and Conciliation Act)  vs appointment by  the commission.

Section 5 of the Arbitration and Conciliation Act, 2003 runs as follows:

“5.Extent of judicial intervention.- Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”

Similarly section 8 runs as follows:

8.“Power to refer parties to arbitration where there is an arbitration agreement.- (1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.”

These provisions referred to are not inconsistent with special enactment like Indian Electricity Act, 2003. In such an event, as long as there is an Arbitration Agreement in existence it excludes the jurisdiction of the Commission to hear the dispute by itself. In other words, such existence of arbitration agreement will act as bar on the jurisdiction of the commission to hear disputes by itself. And the Commission shall have the power only to appoint an arbitrator to adjudicate upon the dispute.

 

Sec 158 of the Indian Electricity Act, 2003:

Section 158. (Arbitration):

Where any matter is, by or under this Act, directed to be determined by arbitration, the matter shall, unless it is otherwise expressly provided in the licence of a licensee, be determined by such person or persons as the Appropriate Commission may nominate in that behalf on the application of either party; but in all other respects the arbitration shall be subject to the provisions of the Arbitration and Conciliation Act, 1996.

If this is true, only the power to appoint an arbitrator is taken away from the Parties to a PPA and is conferred on the Commission. However, as long as the parties agree on arbitration the commission cannot sit upon adjudication by itself and has to instead appoint an arbitrator.

The SC interpreted Section 86(1)(f) of the Electricity Act, 2003  and reconstructed “and” as “or”. Accordingly, Commission may hear the dispute by itself or appoint an arbitrator.

If Arbitration and conciliation Act is to be read harmoniously with the Electricity Act, 2003 (as was the case in Gujarat Urja Vikas Case) the above interpretation should prevail. The SC held that Section 175 of the Electricity Act which says that “this law is in addition and not in derogation of any general law existing “ allows application of Arbitration and Conciliation Act, 1996 except where it is in conflict with the Indian Electricity Act.

If it is not, then all disputes between a licensee and the Generator are at the discretion of the Commission could be heard by it or by the arbitrator appointed by it. This fundamentally takes away the choice of arbitration otherwise available to parties to a PPA.  In such case, all arbitration clauses in standard PPAs (Power Purchase Agreements) become infructuous. Please read this order of Tamilnadu Electricity Commission in the case of GMR Power Corporation Ltd V Tamil Nadu Electricity Board in DRP No. 10/2008. In this case, the Commission decided upon a simple dispute of non payment of arrears by State Board to the generator while rejecting the plea that the Commission is barred to hear itself by arbitration clause contained in the PPA . If  TNERC’s order is upheld by the SC it will exclude arbitration out of the scope of all kinds of disputes under the PPAs.

Is Indemnity a remedy for breach of contract?

It  is quiet common to find in American law centred contracts indemnity clauses which do not limit their scope to third party liability cover or statutory liability cover and instead become very broad statements encompassing all sorts of damages, claims, losses and legal expenses arising “directly or indirectly”  from “breach of the contract” or “negligence of performance” .   This trend may be more seen in IT services Agreement.

This raises the question if indemnity should cover  losses for breach of contract? Or should it limit its scope to covering losses or liabilities which in law can be claimed only from one of the parties? In common law, suit for damages (S 73 and 74  of Indian Contract Act, 1872) is the remedy available to the non defaulting party against the defaulting party to the contract. This remedy is generally available in law whether or not there is express provision in the contract making the remedy available.  So, if this is the case, what additional benefit would the parties claim by adding an indemnity clause to the contract which says “one party shall indemnify the other for losses on account of breach of contract”?

Damages for breach of warranty require the proving of following facts :

(a) it has suffered a loss, and (b) the damage suffered is not too ‘remote’.

In other words the loss was a natural consequence of the breach, the type and extent of which a reasonable person would accept in the circumstances; or

at the time the contract was entered into, the loss was fairly and reasonably contemplated by both parties as the probable result of the breach (this would cover an unusual type of loss due to special circumstances known to the parties from the start). 

Insertion of indemnity clause gives an additional right to the common law remedy of damages. And the number of facts to be proved to claim the indemnity amount are lesser than compared to those in a suit for damages. Since indemnity in itself is a legal right  it requires different set of facts to be proved. Facts like that there has been a breach of contract , there has been loss, the loss occured has arisen out of  breach. The right to claim indemnity is not constrained by other factors like directness or remoteness of the ‘loss’ from the ‘breach’ and the ‘mitigation’ steps taken by the non defaulting party. In other words, these two principles which are usually read with the right to claim damages are not considered while dealing with right to claim indemnity.This led to wide spread popularity of this clause which otherwise would have been limited to cover third party liability which has some connection with the performance of a party under the contract.

A strongly worded indemnity clause ought to be very specific while covering the kinds of losses or damages being covered under the indemnity in the absence of which court may  take them to be outside the scope of  indemnity.

For example:

“Party X shall indemnify Party Y (who shall have no duty to mitigate) for all losses, damages, costs, claims or expenses of whatsoever nature and howsoever caused (including any indirect or consequential loss) arising out of or in connection with a breach by Party X”.

It is not clear how Indian Courts have dealt with the issue of indemnity and breach of contract!

Public funds Private funds, Urgency

Although Land Acquisition Act, 1894 prescribes two procedures for acquisition of Land, Part II in case the acquisition is for public purpose and part vii in case the acquisition is for a company, among other things Part ii is easier and faster procedure for acquisition of land. Moreover, section 17 –urgency clause can be invoked to dispense with section 5A inquiry and for immediate possession of land under Part II of the Act. As of now there seems to be two modes available for state governments to skip part VII procedure and instead follow part II procedure including resort to section 17-urgency clause.

One is where the state promises land acquisition for the project at its own cost under section 41-Agreement of the Act. In this mode, the Govt initiates land acquisition as if it is for ‘public purpose’ and bears the cost of acquisition wholly out of public funds. The acquisition is usually initiated by the state Govt on request from either the nodal agency/department in charge of execution of the Project . Once the acquisition of land is complete then the state Govt transfers possession of the land to the nodal agency or department or public sector Company which in turn will convey or transfer the possession of the land to the project developer. This procedure followed by some state governments was upheld by courts to be perfectly legal and within the scope of the Act.

The other is where the state promises land acquisition for a project and promises to bear cost of acquisition wholly or partly out of state funds under section 41- Agreement. However, the mode of acquisition is different in so far as the declaration under section 6 mentions acquisition of land ‘for a company for a public purpose’. Govt will resort to procedure mentioned in part II and can even invoke s17 –urgency clause during the acquisition process. Courts have upheld this mode of acquisition is perfectly legal and within the scope of the Act as long as there is infusion of public funds into the cost of the acquisition.

‘Public Purpose’ and ‘for Company’

The High Court of AP made the following observations in Sooraram Pratap Reddy and Ors vs District Collector, Ranga Reddy Distt (2008) 9 SCC 552 while dealing with the meaning of ‘public purpose’:

“The only guiding rule for the determination of its meaning is that the proposed acquisition or requisition should tend to promote the welfare of the community as distinct from the benefit conferred upon an individual. The mere fact that the immediate use is to benefit a particular individual would not prevent the purpose being a public one, if in the result it is conducive to the welfare of the community.”

While explaining the determining factors for ‘public purpose’ under the Act the court held –

“Section 6 is, in terms, made subject to the provisions of Part VII of the Act. The provisions of Part VII, read with Section 6 of the Act, lead to this result that the declaration for the acquisition for a Company shall not be made unless the compensation to be awarded for the property is to be paid by a company. The declaration for the acquisition for a public purpose, similarly, cannot be made unless the compensation, wholly or partly, is to be paid out of public funds. Therefore, in the case of an acquisition for a Company simpliciter, the declaration cannot be made without satisfying the requirements of Part VII. But, that does not necessarily mean that an acquisition of a Company for a public purpose cannot be made otherwise than under the provisions of Part VII, if the cost or a portion of the cost of the acquisition is to come out of public funds. In other words, the essential condition for acquisition for a public purpose is that the cost of the acquisition should be borne, wholly or in part, out of public funds. Hence, an acquisition for a Company may also be made for a public purpose, within the meaning of the Act, if a part or the whole of the cost of acquisition is met by public funds. If, on the other hand, the acquisition for a Company is to be made at the cost entirely of the Company itself, such an acquisition comes under the provisions of Part VII. As in the present instance, it appears that part at any rate of the compensation to be awarded for the acquisition is to come eventually from out of public revenues, it must be held that the acquisition is not for a Company simpliciter.”

It cannot be maintained that where the acquisition is primarily for a company it must always be preceded by action under Part VII and compensation must always be paid wholly by the company. A third class of cases is possible where the acquisition may be primarily for a company but it may also be at the same time for a public purpose and the whole or part of compensation may be paid out of public revenues or some fund controlled or managed by a local authority.

Supreme Court of India in (2003)10 SCC 626 Pratibha Nema & others Vs. State of M.P. & others pointed out the following distinction:

“………Thus, it is seen that even in a case of acquisition for a Company, public purpose is not eschewed. It follows, therefore, that the existence or non-existence of a public purpose is not a primary distinguishing factor between the acquisition under Part II and acquisition under Part VII. The real point of distinction seems to be the source of funds to cover the cost of acquisition. In other words, the second proviso to Section 6(1) is the main dividing ground for the two types of acquisition.”

The question as to in what stage decision to contribute public fund is to be taken has been considered and answered in Devinder Singh’s case. Devinder Singh Vs. State ofPunjab & Ors, (2008) 1 SCC 728. The facts of Devinder Singh’s caseand the proposition as laid down by the Apex Court after considering the earlier judgments of this Court needs to be noted in detail. Section 4 notification issued in the said case provided that the land is likely to be required to be taken by the Government “at the public expense”, for a public purpose, namely for setting up of a Ganesha Project, M/s National traders Ltd at Village Chak Gujran, Tehsil & Distt. Hoshiarpur. Objections were filed under Section 5-A. An agreement under Section 41 of the Act was entered into between the Company and the Sate. Notification under Section 6 was also published on the same date i.e. 27/2/2003. The land owners challenged the notification issued under Sections 4 and 6. During the pendency of the writ petition a sum of Rs. 100/- was deposited by the State as a token amount for acquisition of the said land. The writ petition was dismissed by the High Court.

Supreme Court of India while upholding the decision of the High court in the above case held the following:

“We do not know as to at what stage the State thought it fit to meet a part of the expenses for acquisition of land. Such an opinion on the part of the State having regard to the statutory scheme should have been formed prior to entering into the agreement itself. The agreement does not mention about any payment of a part of compensation by the State. We, in absence of any other material on record, must hold that the State had not formed any opinion in that behalf at least when the agreement was executed. The wisdom in all probabilities dawned on the officers of the State at a later stage.”

In Pooran Singh and others Vs Stae of UP Allahabad HC  once again examined the issue of infusion of Public funds for acquisition for a Company. The Allahabad HC concluded that contribution by the state government towards acquisition of land for a company for a public purpose should be done by way of promise by the State in an Agreement with the Company complying all provisions of Section 41 before S-4  preliminary notification is issued under the Act. 

Therefore any Company (Public limited company) which desires that acquisition proceedings to be followed by the state Government should be those stated in Part I instead of those stated in Part VII of the Land Acquisition Act, 1894 should ensure state government follows following procedure.

Agreements in restraint of legal proceedings and exclusive jurisdiction clauses in international contracts.

Sec 28 of the Indian Contract Act :

“Every agreement,(a) by which any party there to is restricted absolutely from enforcing his rights underor in respect of any contract, by the usual legal proceedings in the ordinary tribunals,or which limits the time with in which he may thus enforce his rights;…………….” is void to that extent.

The issues surrounding exclusive jurisdiction clauses in India are to two folded. One is the affect of Sec 28 on exclusive jurisdiction clauses in India and another is the affect on cross border contracts.
Are the clauses which restrict the right of parties to approach any court in India which has competent jurisdiction to grant the relief void?

Domestic Jurisdiction of Civil courts in India

All civil courts in India below High court derive their authority to try all kinds of civil suits from

Section 9 of the Code of Civil Procedure.

“The Courts shall (subject to the provisions herein contained) have jurisdiction to try all suits of a civil nature excepting suits of which their cognizance is either expressly or impliedly barred.”

So Courts in India unlike some American Courts derive jurisdiction solely from the Code. This jurisdiction is normally subject to territorial and pecuniary limitations further set out in the code and the concerned State law creating the civil court.

In Hakam Singh Vs Gammon (India) Ltd AIR1971SC740, (1971)1SCC286, [1971]3SCR314, Supreme court of India discussed the issue of jurisdiction of Courts in India as follows:

“By Clause 13 of the agreement it was expressly stipulated between the parties that the contract shall be deemed to have been entered into by the parties concerned in the City of Bombay. In any event the respondant have their principal office in Bombay and they were liable in respect of a cause of action arising under the terms of the tender to be sued in the Courts at Bombay. It is not open to the parties by agreement to confer by their agreement jurisdiction on a Court which it does not possess under the Code. But where two courts or more have under the CPC jurisdiction to try a suit or proceeding an agreement between the parties that the dispute between them shall be tried in one of such Courts is not contrary to public policy. Such an agreement does not contravene Section 28 of the Contract Act.”<

The Supreme Court in British Steam Navigation case [19902CompLJ1(SC), 1990(48)ELT481(SC), JT1990(1)SC528case] had further interpreted S28 of the Contract Act as applied to cross border transactions. The key to this interpretation are the words “absolutely” in Section 28. Court considered that Sec 28 while declaring clauses which are in restraint of judicial/legal proceedings are void is applicable only if the restraint is absolute.

So If the contract is domestic one and the parties are both Indian nationals any clause in contract which confers jurisdiction on some specific court to the exclusion of others is not hit by S28 . However, in such a case the specific court referred to in the contract should have jurisdiction (under the code) i.e ‘competent to try the suit’. Since partial restraint of the party to limit his legal relief to one court is not against public policy (waiver of private rights under a contract is lawful as long as such waiver is not against public policy) and only partial restraint the clause is enforceable.

Foreign Jurisdiction

Where the other party has an option to get a remedy in another jurisdiction and not necessarily in India the clause holds good as the condition is not absolute restraint. Court had essentially considered whether one party to the contract would be left absolutely remedy less of the exclusive jurisdiction clause is enforced. In a proceeding before the Indian Court if it is proved as a matter of fact by evidence that the other party to the contract has legal remedy in foreign jurisdiction then the Indian court would not further interfere in the matter since the plaintiff still has some legal remedy albeit in foreign jurisdiction. However, in case of cross border transactions the issue is little more complicated. Every Indian Court as per Indian Evidence Act takes judicial notice of all laws of Republic of India. Laws of foreign countries need to be proved in a court of law by production of relevant evidence. So in case of foreign jurisdiction clauses excluding jurisdiction Indian Courts, the defendant has to prove by production of documentary and other evidence that the foreign country referred to in the contract in fact has laws which provide adequate legal remedy to him. In case of domestic contracts since the court already takes judicial notice of the laws, it will only check if the other court in India is competent to try to the suit or not. If the other court is competent to try the suit it will not further entertain the suit arising from the contract.

Assignment, Novation and Security

Introduction

Assignment of a contract (rights and liabilities under the contract) with notice and consent of other party normally vests in the assignee an absolute interest in the contract which has been assigned. In other words, assignment by its very nature falls in the category of sale except that the underlying transfer of interest is in rights under a contract and not in physical goods. Assignment falls in the genre of transfer of property which transfers absolute property to the assignee similar to ‘sale’ which should normally transfer all the property in goods or other property absolutely and unconditionally.

However, I have noticed that many banks and other financial institutions use ‘assignment’ for purposes of security for loan. If one goes by mere definition and meaning of assignment and compare it with other modes of transfer of interest like Mortgage, pledge, bailment, hypothecation etc, the fundamental difference lies in kind of interest being transferred by such transfer. A transfer by way of mortgage, pledge or bailment transfer only limited property (often referred to as General or Special property) and not absolute interest (so as to make transferee the owner). However, an assignment or sale transfers absolute interest in the property to the transferee. Normally, the property so transferred is irrevocable. I have security documents which use ‘assignment’ in the same vein as they refer to ‘mortgage’, ‘pledge’, hypothecation etc. They have used statements like “We hereby assign by way of security….” in these security documents. I have also wondered how can a borrower assign (literally ‘selling’) his interest in his ‘project documents’ to banks for sake of availing loans. Once assigned normally the assignee (banks) becomes true owner of all rights under the contract (project documents).
Firstly, I will explain the common law principles of assignment and novation and then focus on assignment as a security for debt.

Assignment by Act of parties may cause assignment of rights or of liabilities under a contract. As a rule a party to a contract cannot transfer his liabilities under the contract without consent of the other party. This rule applies both at the Common Law and in Equity (vide para 337 of Halsburys Laws of England, Fourth Edition, Part 9).

Assignment and notice

In Khardah Company Ltd. v. Raymon and Co. India (Pvt.) Ltd., AIR 1962 SC 1810. T. L. Venkataramiah J. who spoke for the Bench has observed thus (at p. 1817 of AIR) :

“The law on the subject is well settled and might be stated in simple terms. An assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule obligations under a contract cannot be assigned except with the consent of the promise, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the law or under an agreement between the parties.”

In common law where assignment of liabilities is also made but without notice and consent of the other party to the contract in such case the assignee acquires only “right in personam” or only right against the assignor who has transferred him the interest. Applying the doctrine of privity of contract, the assignee has no right to sue the other party either for performance of the contract or for damages in case of breach without joining the assignor as a party to suit against the other party or without obtaining the consent of assignor.

Section 130 and 138 of the Transfer of property Act, 1882 deal with assignment of actionable claims (unsecured debts which are lawfully enforceable) and similarly Insurance Act also deal with assignability of fire insurance policies and life insurance policies.
Section 38 of the insurance Act waives the requirement issue of notice of assignment to the other party in case the assignment is to the other paty.-
Assignment and transfer of insurance policies

S38.
(1) A transfer or assignment of a policy of life insurance, whether with or without consideration may be made only by an endorsement upon the policy itself or by a separate instrument, signed in either case by the transferor or by the assignor his duly authorised agent and attested by at least one witness, specifically setting forth the fact of transfer or assignment.
(2) The transfer or assignment shall be complete and effectual upon the execution of such endorsement or instrument duly attested but except where the transfer or assignment is in favour of the insurer shall not be operative as against an insurer and shall not confer upon the transferee or assignee, or his legal representative, and right to sue for the amount of such policy or the moneys secured thereby until a notice in writing of the transfer or assignment and either the said endorsement or instrument itself or a copy thereof certified to be correct by both transferor and transferee or their duly authorised agents have been delivered to the insurer.

Similarly, subsection 5 of the above section restates the common law position on assignment with proper notice to the other party as follows:

“The Insurer shall recognise the transferee or assignee named in the notice as the only person entitled to benefit under the policy, and such person shall be subject to all liabilities and equities to which the transferor or assignor was subject at the date of the transfer or assignment and may institute any proceedings in relation to the policy without obtaining the consent of the transferor or assignor or making him a party to such proceedings.”

Conditional Assignment of Life insurance policies is allowed specifically under this sub –section (7)

Notwithstanding any law or custom having the force of law to the contrary, an assignment in favour of a person made with the condition that it shall be inoperative or that the interest shall pass to some other person on the happening of a specified event during the lifetime of the person whose life is insured, and an assignment in favour of the survivor or survivors of a number of persons, shall be valid.

The above sub section allows conditional assignment similar to ‘mortgage by conditional sale’ U/s 58 of the Transfer of Property Act, 1882. In this kind of mortgage, Mortgage deed is executed creating vested interest in the property in favour of the mortgagee. This interest becomes absolute when the mortgage money is not paid or becomes void on payment of the mortgage money on time. This transaction which is conditional sale is a form of mortgage recognized in law. The above assignment of life insurance enables an insurance company to sanction a loan to the policy holder against the security of his own life policy.

English mortgage and assignment: S 58 of the Transfer of property Act, 1882 recognizes English mortgage which transfers the interest absolutely (sale) to the mortgagee but with a condition added that the mortgagee shall reconvey the property to the mortgagor on payment of mortgage money.

This kind of mortgage which is for all purposes sale is also called mortgage because of an added condition and the purpose for which the sale is made (debt amount).Assignment could also be an English assignment which requires the assignee to re transfer or reassign all the rights back to the assignor on payment of the loan sum.

Section 130 of Transfer of Property Act, 1882 – Transfer of actionable claim

(1) The transfer of an actionable claim whether with or without consideration shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorized agent, shall be complete and effectual upon the execution of such instrument, and thereupon all the rights and remedies of the transferor, whether by way of damages or otherwise, shall vest in the transferee, whether such notice of the transfer as is hereinafter provided be given or not…………….

Notice which is normally required under equity is waived by this provision with regard to actionable claims.

Section 135 of TP Act- Assignment of rights under policy of insurance against fire

“Every assignee by endorsement or other writing, of a policy of insurance against fire, in whom the property in the subject insured shall be absolutely vested at the date of the assignment, shall have transferred and vested in him all rights of suit as if the contract contained in the policy had been made with himself.”

Being absolutely vested it is direct beneficiary of the policy and is entitled to receive the sum unlike other forms of security like mortgage which do not confer automatic rights.

Supreme court of India had stated the effect of “absolute interest” as used in the above section as follows (SC)43, AIR1999SC29  Indu Kakkar vs Harayna State Industrial Development corporation and another:

“In our opinion, therefore, the submission of the learned Counsel for the Bank that as soon as a decree is passed or order is made in favour of the complainants, the Bank is entitled to the said amount is well founded. For such a relief, it is not necessary for the Bank to become a plaintiff by filing a suit in a competent Court of law and obtain a decree in its favour. It is true that had it been the position, the provisions of 1997 Act would get attracted and such suit would be stayed and no decree could have been passed by a competent Court in favour of the creditor. But in the light of the statutory provisions in the Insurance Act and in the Transfer of Property Act, the Bank is entitled to the amount directly from the Insurance Company.”

Summary of the above principles

(1)To sue in assignee’s own name the assignment should have been done with the notice of the other party to the contract .In equity , if the assignment is done without such notice the other party need not discharge his obligation to the assignee and neither assignee has the right to sue for performance with out taking consent of the assignor or joining him in such suit .
However, if the assignment is done with notice of the other party then the assignee in equity has a right to sue in his own name.

(2)Exemption to the above equity principle is statutory waiver of the notice requirement.
If the Act enables the assignee the right to sue in his own name with out such notice/approval as in case of insurance policies and actionable claim then he can sue in his own name without requiring the approval /consent of the assignor.

(3)The kind of assignment of insurance policies/any right under a contract to a bank against the loan amount sanctioned by it is sometimes in the nature of assignment creating vested interest and not absolute interest in the right. Some times similar to English mortgage it could be absolute interest with an added condition requiring reassignment to the assignor on payment of the debt.

(4)Conditional interest is full interest in the property concerned (in this case a contract) except that it is not absolute. So for all practical purposes, the assignee will have all rights in the property /rights under contract concerned except that in future there is possibility of assignee loosing all his rights in favour of assignor in case of repayment of the amount due by the debtor on time. Does it mean such assignor of conditional assignment has any interest left in the property/right under a contract?

Remedies under a true Hire purchase Agreement

From the point of view of the financier, the owner under a hire purchase agreement will have the following rights. He can receive the price of the vehicle in installments by way of what may be called “hire or rental price of the vehicle”. The Financier remains the owner of the goods and he can claim repossession of the goods from the hire purchaser without the intervention of the court in case there is default in the payment of the agreed hire or installment money. He can also claim any arrears of hire purchase from the hire purchaser. However, he cannot require the hire purchaser to buy the goods at the end of installments. When there is no binding obligation on the hire purchaser to purchase the goods but only a right to purchase (option ) the owner cannot sue for price of the goods. However, he can retain all the hire purchase money he received so far against the goods (this is because this sum is consideration for goods given on hire purchase ).The owner has a right to repossess goods which have althrough this time remained his goods without the need to approach the court of law.

On the flip side, the hire purchaser on default and repossession of the goods will forfeit all the money already paid to the owner by way of hire purchase sum.

In case of hypothecation, the borrower becomes the owner of the goods. The financier merely provides loan against the security of the goods. In case of default, it gives him the right to cause the goods of the owner to be sold with the intervention of the court. He cannot directly seize the goods unless there is a clause in the contract to the contrary as they are owned by the borrower. However, he can recover the price of the goods (loan amount) from the borrower if the proceeds from the sale of goods do not cover the loan amount. This is because there is a debt incurred by the borrower unlike a hire purchase where there is no debt incurred by the hire purchaser.
Hybrid Hire Purchase Agreements

However, in modern practice, financier of goods drafts agreements which have some elements from the hypothecation and some from the hp agreement. The intention of financier is to avail both the remedies available under these agreements. Courts on the other hand, atleast in India have been consistently interpreting the contract to be either hp or hypothecation so as to let the financier avail only one set of remedies as against others.

In these agreements, one part of the agreement states that the financier is the owner of the goods and on payment of last installment the owner becomes absolute owner of the goods. In other parts, these agreements require the hire purchaser to execute a promissory note binding himself personally to pay the entire price of the goods. Many times these agreements do not give an option to the hire purchaser to not purchase the goods. These agreements also require a sale letter by the hire purchaser in favour of the financier but the same is not required under the agreement to be registered (see Central Motor vehicles Act). In simple terms, if the court decides the agreement is hire purchase the financier has no option to recover the price of the goods ( since it is not loan amount incurred by the hire purchaser). He can retain whatever amount has been paid towards the hire purchase. This would leave the financier in a situation where he had sunk capital by way of payment s made to the dealer of goods but he cannot recover the full cost of the goods from the hire purchaser. On the other hand, if the court decides the agreement to be hypothecation, financier can recover the whole of price of the goods both through sale of goods and also personally from the hire purchaser. However, since ownership in goods is with the hire purchaser, any repossession and sale requires  intervention of the court.

And in cases where the agreement does not give the hire purchaser an option to purchase but an obligation to purchase the goods,  financier cannot sue for price of goods once the goods are repossessed (if the ownership has not passed) and he cannot sue for possession of goods (if the ownership has passed)but merely for price of the goods.

Brief History of Hire Purchase Law in India

1961- Law commission of India Report on hire purchase in India
This contains draft of proposed bill on hire purchase in line with then existing British law.

1972-Hire purchase Act, 1972 was passed

1999- Law commission of India report on amendments to the Hire purchase Act, 1972

2005- Hire Purchase Act (Repealing Act), 2005



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