SAT remands Sahara (merger) case back to IRDAI, records reservations over its conduct

The Securities Appellate Tribunal (SAT) has, while upholding two orders, reversed a third order passed by the Insurance Regulatory and Development Authority of India (IRDAI) in the case of Sahara India Life Insurance Corporation Limited (Sahara)..Sahara, the appellant before SAT, has been under the IRDA’s scanner ever since the then CEO, Subrata Roy, was detained by the Supreme Court in 2014 for failing to comply with Court’s orders..Prelude.IRDAI started issuing notices/letters to Sahara in 2015 seeking clarifications on observations made by it in the annual report of the FY 14-15. Nearly 2 years after the first clarification was sought and after a series of unsatisfactory responses, a Show Cause Notice (SCN) was issued in March 2017, calling upon Sahara to show cause as to why appropriate proceedings should not be initiated against it..Meanwhile, an investigation was already underway under Section 33 of the Insurance Act, 1938, for which a chartered accountant firm was appointed as the “Investigating Authority”. Pursuant to the report submitted the Investigating Authority, an order appointing an Administrator was passed by the IRDA under Section 52A of the Insurance Act, on June 12, 2017..Based on the report of the Administrator, a second order under Section 52B was passed by the IRDA which essentially ordered close of business on 23rd June. And on 28 July, 2017, a third order under Section 52B was passed by the IRDA directing transfer of the life insurance portfolio of Sahara Life to ICICI Prudential..The above three orders were appealed by Sahara before the SAT..Preliminary objection.The IRDA, however, sought to challenge the maintainability of the appeal on grounds of jurisdiction; arguing that the Administrator steps into the shoes of the Insurer, which takes away the Insurer’s right to file the suit in the first place..The SAT, however, found this argument to be untenable and ruled that such an interpretation would lead to absurdity inasmuch as no Insurer company would ever be in a position to appeal the appointment of an administrator to the SAT..Disagreeing with the parallels being drawn with a resolution professional under the Insolvency and Bankruptcy Code, 2016, the SAT observed that the Insurance Act conspicuously seems to be missing the provision which displaces the management altogether and held that,.“…it emerges that the fact of a company going into administration per se does not put a complete end to the existence of the management of the company concerned. Certain residuary powers in the hands of the management empower it to undertake such acts as are necessary to ensure the company’s survival”, ruled the SAT..Order #1: June 12, 2017.Sahara sought to challenge the first order for not having been given sufficient notice or opportunity of being heard. In fact, the said order was passed on the basis of an investigation report which wasn’t provided to Sahara at all..The SAT, however, in its order recorded that the only dispute between both the parties was regarding submission of a more satisfactory response by Sahara to the IRDAI. SAT also records that the IRDAI, upon request, adjourned the personal hearing afforded to Sahara. It further records that neither was any further opportunity to file a reply asked for by Sahara, nor did it seek any document for the appointment of the Administrator.Therefore, this appeal was rejected and the plea of not having been an opportunity of hearing was refused as well..“Sometimes, the barest notice, the littlest opportunity “in the shortest time” may serve the ends of justice.” , says the SAT order..Order #2: 23 June 2017.The IRDAI, on the basis of a report submitted by the Administrator under Section 52B, passed order dated June 23, 2017, directed Sahara to not procure/collect proposals deposits/underwrite new business, with immediate effect..However the SAT refrained from interfering with this order made by the IRDAI on the virtue of it being a ‘consequential order’ and pure a ‘stop-gap arrangement’ that ‘enables’ the Administrator to concentrate more on the existing affairs of the Insurer company..Order #3: 28 July, 2017.Another report submitted by the Administrator to the IRDAI, lead to this third order by which Sahara was directed not to carry on life insurance business after, to surrender its Certificate of Registration, and most importantly, the IRDA directed the insurance business of the Sahara to be altogether transferred to an entirely different and outside company, namely – ICICI Prudential Life Insurance Company Limited..The SAT realised the potential and adverse affect of this particular order on Sahara, and therefore, noted that the IRDAI must have supplied a copy of the report to the Sahara before passing the order, to enable Sahara to make a representation on the Administrator’s report in question. It also held that the principles of proportionality before resorting to such extreme measures must be applied,.“In the instant case, the order is passed mechanically rather than by due application of mind on the facts and circumstances of the case, including the overall scheme of the Insurance Act read with that of IRDA Act.”.It further held,.“This action of the IRDAI is clearly in breach of the principles of natural justice. The same cannot be countenanced when we look at the larger scheme of the Insurance Act and the place the Respondent occupies in regulating the insurance business in the country. The impugned order dated July 28, 2017, therefore, deserves to be quashed and set aside and we order accordingly.”.As a result of this order, the case will now proceed before the IRDAI from the stage of seeking a representation/response from Sahara on the Administrator’s report in question as well as providing opportunity of being heard to the Appellant in consonance with the principles of natural justice..SAT’s reservations.Even while upholding IRDAI’s first two orders, the SAT made sure to make a reference to the (arguably) irresponsible manner in which they were passed, and recorded that,.“The IRDAI should be more vigilant in future by deputing more responsible officers in court to observe the court’s proceedings and follow the Tribunal’s direction, including oral direction as regards the submission of records, etc.” .Furthermore, on demanding the files and documents (pertaining to the Investigation) which lead to the appointment of the Administrator, the SAT recorded,.“But we note with regret that the IRDAI instead of supplying the records, as orally directed three to four times in the open court, chose not to produce the same and, therefore, we are in the dark as to the factors which motivated the IRDAI to appoint an Administrator for the appellant company while an investigation by an independent Investigating Authority was still on-going under Section 33 of the Insurance Act, at the instance of the IRDAI itself.” .SAT’s reluctance towards dismissing the appointment of the Administrator on ‘technical grounds’, by its own admission, stems from an already chaotic regulatory system which is itself trying to evolve a workable and mature administrative system to deal with cases pertaining to insurance companies violating the law..Also with regards to the second order passed on June 23, the SAT reserved its concerns with respect to the non supply of Administrator’s report to Sahara before passing this order, and recorded that ,.“But, we are of the considered opinion that this report of the Administrator, which has now been produced before us, should have at least been supplied to the Appellant before passing the impugned order dated July 28, 2017.”.While the first two orders were upheld by the SAT for the reasons mentioned earlier, SAT left no doubts on its disapproval with the callous nature of the IRDAI in conducting these proceeding..Laywers.IRDAI was represented by law firm Suvan Law Advisors with Counsel Somasekhar Sundaresan. Sahara was represented by Counsel Gaurav Joshi with law firm Markand Gandhi while ICICI Prudential was represented by Cyril Amarchand Mangaldas.