# DR. A. LAKSHMANASWAMI MUDALIAR AND OTHERS v. LIFE INSURANCE CORPORATION OF INDIA AND ANOTHER

- **Citation:** [1963] Supp. 2 S.C.R. 887
- **Court:** Supreme Court of India
- **Decided:** 1963
- **Bench:** B. P. Sinha C.J, P. B. Gajendragadkar, K. N. W ANCHoo, K. C. DAS GuPTA, J. C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/dr-a-lakshmanaswami-mudaliar-and-others-v-life-insurance-corporation-of-india-2862
- **Pages:** 19

## Headnote

ln•uranu Uompany-Donation by Directors-If ultra
vi~•-Shareholdera' Dividend Account-Proprietary riuAt; if in
•hareholdera -
Memorandum of ABBocialion -
ComtrnclionLiahility of Directors-Life Insurance Corporation Acl, 1956
(31of1956), a. 15.
OnJuly 15, 1955, at an Extraordinary General Meeting
of the shareholder. of the United India Life Assurance Com·
pany Ltd., a resolution was passed, among other matter.
sanctioning a donation of Rs. 2 lakhs from out of the Shareholders' Dividend Account to a Trust proposed to be formed
with the object inter alia of promoting technical or business
knowledge, including knowledge in insurance.
On July l, 1956, the Life Insurance Corporation Act
came into force b)' the provhions of which on the appointed
day all the assets and liabilities appertaining to the controlled
business of an insurer vested in the Life Insurance Corporation.
Bys. 15(1-)(a) of the Life Insurance Corporation Act power
was given to the Corporation to apply
to the Tribunal
for relief in respect of payments made by the insurers, during
the five years preceding the date of vesting, not reasonably
necessary for the purpose of the controlled business.
The
Corporation applied to the Tribunal for l'elief in respect of the
payments of Rs. 2 lakhs hy the Company to the appdlants on
the ground that the safrl payment was uu,a v:re. the powers of
the company and was not reasonably neces.=;ary for the purpose
of the controlled business. The Tribunal ordered the appellants to restore the sum of Rs. 2 lakhs to the Corporation. On
appeal by special leave.
Held, that the Sharc!iolders' Dividend Account provided
for by the articles did not confer any proprietary interest on
1962
D1ttmblr, JJ.
Dr. A. LV.slunana~
swami ~\tuJaliar .
v.,.
Life Insuranc1
CorJn. of India
SSS . ;SUPREME COURT REPORTS (1963] SUPP.
the shareholders, though if· was charged for the purpose of
paying dividends to the shareholders and that the mere
description of the dividend account as the exclusive property
of the shareholders did not thereby create a
proprietary
interest in the shareholders. The right to dividend depends
upon the recommendation . to be made by· the Directors without which the shareholders acquire no right to the fund or any
part thereof.
·
:
Bacha F. Guzdar v. Commissioner of Income-taz, Bombay,
[1955] 1 S.C.R. 876, refeired to.
·Held, further, that the meeting in· which the re•olution ·
was passed wa• a meeting of the Company and it could not be
contended that it was a meeting of the shareholders in their
individual capacity.
Ileld, further, that the resolution of the company and
the acceptance by the appellants of the amount did not
constitute a contract there being no con'.iideration to support it.
Held, further, that the object of the company viz. to "invest and deal with funds and assets of the company upon silch
securities or investments'' could not authorise the making of
the donation and such a power which was not expressly provided fo~ by the memorandum could not be found by reference
to the general clause of the Memorandum giving power to do
incidental things •.
Egyptian Salt&: Soda Company v. Port Said Salt Association, (1931) A. C. 677 and Ashbury Railway Carriages and Iron
Company v. Riche, (1875) L. R. 7. H. L. 653, referred to.
Ileld, further, that the resort to the Articles of Association
for the purpose Or construing the Memorandum was permissible
only on matters regarding \vhich the ~femorandum was silent
or ambiguous.
· Angoatura Bittera &: Company Ltd. v. Kerr, [1933] A.C.
550, referred to.
Held, further, that the making of donations to the Trust
which may or may not provide indirect or remote benefits to
-
the business of insurance \Vas not lvithin the po,ver of the
company.
Tomkinson v. South Eastern Railwa11, (1387) 35 Ch, D,
675, referred to.
-
'
....,
2 S.C.R.
SUPREME COURT REPORTS
889
Held, also, that the action of the Company being ultra
vires, it created no legal effect and could not be ratifit•d even
if all the sharehol

## Text

2 S.C.R.
SUPREME COURT REPORTS
887
DR. A. LAKSHMANASWAMI MUDALIAR
AND OTHERS
v.
LIFE INSURANCE CORPORATION
OF INDIA AND ANOTHER
(B. P. SINHA C.J., P. B. GAJENDRAGADKAR,
K. N. W ANCHoo, K. C. DAS GuPTA and
J. C. SHAH, JJ.)
ln•uranu Uompany-Donation by Directors-If ultra
vi~•-Shareholdera' Dividend Account-Proprietary riuAt; if in
•hareholdera -
Memorandum of ABBocialion -
ComtrnclionLiahility of Directors-Life Insurance Corporation Acl, 1956
(31of1956), a. 15.
OnJuly 15, 1955, at an Extraordinary General Meeting
of the shareholder. of the United India Life Assurance Com·
pany Ltd., a resolution was passed, among other matter.
sanctioning a donation of Rs. 2 lakhs from out of the Shareholders' Dividend Account to a Trust proposed to be formed
with the object inter alia of promoting technical or business
knowledge, including knowledge in insurance.
On July l, 1956, the Life Insurance Corporation Act
came into force b)' the provhions of which on the appointed
day all the assets and liabilities appertaining to the controlled
business of an insurer vested in the Life Insurance Corporation.
Bys. 15(1-)(a) of the Life Insurance Corporation Act power
was given to the Corporation to apply
to the Tribunal
for relief in respect of payments made by the insurers, during
the five years preceding the date of vesting, not reasonably
necessary for the purpose of the controlled business.
The
Corporation applied to the Tribunal for l'elief in respect of the
payments of Rs. 2 lakhs hy the Company to the appdlants on
the ground that the safrl payment was uu,a v:re. the powers of
the company and was not reasonably neces.=;ary for the purpose
of the controlled business. The Tribunal ordered the appellants to restore the sum of Rs. 2 lakhs to the Corporation. On
appeal by special leave.
Held, that the Sharc!iolders' Dividend Account provided
for by the articles did not confer any proprietary interest on
1962
D1ttmblr, JJ.
Dr. A. LV.slunana~
swami ~\tuJaliar .
v.,.
Life Insuranc1
CorJn. of India
SSS . ;SUPREME COURT REPORTS (1963] SUPP.
the shareholders, though if· was charged for the purpose of
paying dividends to the shareholders and that the mere
description of the dividend account as the exclusive property
of the shareholders did not thereby create a
proprietary
interest in the shareholders. The right to dividend depends
upon the recommendation . to be made by· the Directors without which the shareholders acquire no right to the fund or any
part thereof.
·
:
Bacha F. Guzdar v. Commissioner of Income-taz, Bombay,
[1955] 1 S.C.R. 876, refeired to.
·Held, further, that the meeting in· which the re•olution ·
was passed wa• a meeting of the Company and it could not be
contended that it was a meeting of the shareholders in their
individual capacity.
Ileld, further, that the resolution of the company and
the acceptance by the appellants of the amount did not
constitute a contract there being no con'.iideration to support it.
Held, further, that the object of the company viz. to "invest and deal with funds and assets of the company upon silch
securities or investments'' could not authorise the making of
the donation and such a power which was not expressly provided fo~ by the memorandum could not be found by reference
to the general clause of the Memorandum giving power to do
incidental things •.
Egyptian Salt&: Soda Company v. Port Said Salt Association, (1931) A. C. 677 and Ashbury Railway Carriages and Iron
Company v. Riche, (1875) L. R. 7. H. L. 653, referred to.
Ileld, further, that the resort to the Articles of Association
for the purpose Or construing the Memorandum was permissible
only on matters regarding \vhich the ~femorandum was silent
or ambiguous.
· Angoatura Bittera &: Company Ltd. v. Kerr, [1933] A.C.
550, referred to.
Held, further, that the making of donations to the Trust
which may or may not provide indirect or remote benefits to
-
the business of insurance \Vas not lvithin the po,ver of the
company.
Tomkinson v. South Eastern Railwa11, (1387) 35 Ch, D,
675, referred to.
-
'
....,
2 S.C.R.
SUPREME COURT REPORTS
889
Held, also, that the action of the Company being ultra
vires, it created no legal effect and could not be ratifit•d even
if all the shareholders agreed and payments made pursuant to
such action created no rights in the appellants and they were
rightly directed under s. 15 of the Life Insurance Corporation
Act to personally refund the amount.
ClVIL APPELLATE JURISDICTION : Civil Appeal
No. 400 of 1961.
Appeal by special leave from the order dated
December 20, 1!!58, of the Life Insurance Tribunal,
Nagpur in Case No. 21/XV of 1958.
Puruskottam Tricumdas, J.B. Dadaclianji, 0.0.
llfatk1tr and Ravinder Narain, for the appellants.
0. K. Daphtary, Solicitor General oj India,
G. B. Prtthak, B. R. L. Iyengar, J. P. Shroff and
K. L. Hathi, for respondent No. 1.
1962. December 11. The J udgmelit of the Court
was delivered by
Sru.H, J.-This is an appeal from the order
dated December 20, 1958, of the Life Insurance
Tribunal in case No. 21/XV of 1958.
The United India Life Assurance Company
Ltd.-hereinafter called 'the Company'-incorporated under the Indian Companies Act, 1882, with the
principal object of carrying on life insurance business
in all its branches was registered as an insurer under
the Life Insurance Act, VI of 1938 for carrying on
life insurance business in India. On July 15, 1955,
at an extraordinary General Meeting of the share·
holders of the Company, the following resolution,
amongst others, was passed :-
"Resolved that a donation of Rs. 2 lakhs
be sanctioned from out of the Shareholders'
1961
/!r. A. I.oks/mutaa·
swon1i Mudalilu
••
Life Jns11ranc1
Corpo. of India
Shah, /,
1962
Dr. A. Lak.rhmana·
s10Mni AftulaUar
v.
Llf1 /nsuranrt
Corpn. of Indio
Shah, J.
890 SUPREME COURT REPORTS [1963] SUPP.
Dividend Account to the M. Ct. M. Chindam·
bararn Chettyar l\frmorial Trust proposed
to be formed with the object, inter alia, of
promoting technical or business knowledge,
including knowledge in insurance.
Resolved further that the Directors be and
are hereby authorised to pay the aforesaid sum
to thr. Trustees of the aforesaid Trust when -
it is formed."
On the date of this resolution, appellants 2 & 4 were
Directors of the Company, appellant 4 being the
Chairman of the Board of Directors. On December
H, 1955, five settlers (including the Company) executed a deed reciting that the settlers desired to
establish a charitable trust for commemorating the
name of the Late M. Ct. M. Chidambaram Chettyar
"befitting his services to various institutions and orga·
nisations with which he was connected, and to industry,
commerce, finance, art and science in general and the
great encouragement he gave to education, training,
research and promotion of human relationship," and
with that object the settlers had declared, transferred
and delivered to the trustees a sum of Rs'. 25,000/·
__,_
and interest, rents, dividends, profits and other income
thereof to be held upon Trust for the objects and
purposes mentioned m the deed. The objects of the
Trust were manifold, e. g. to establish and maintain
scholarships, stipends, allowances to be awarded to
Indian
students
for
prosecuting
studies,
to
provide chairs or lecturerships, to conduct competi·
tious to test proficiency in the art of essay writing or
speaking, "to promote art, science, industrial, techni·
cal or business knowledge including knowledge in
banking, insurance, commerce and industry", to esta·
blish and maintain subsidies or support, charities in \ ...
India engaged in improving human relations in
industrial or commercial affairs, to establish and
maintain or support any educatioqal jQStit1.1tion or
2 S.C.R.
SUPREME COURT REPORTS
891
libraries in India for imparting general, technical or
scientific knowledge and to give subscriptions or
donations or to render financi.al assistance to any
educational or other charitable institution in India.
Appellants 2, 3 & 4 were the trustees nominated
under the deed of ·trust, and the first appellant was
appointed a trustee under cl. 8 of the deed.
In pur·
suance of the resolution dated July 15, 195~, of the
Directors of the Company made an initial instalment
of Rs. 5,000/- to the trustees and the balanc~ of
Rs. 1,95,000/- was paid on December 15, 1955.
On July 1, 1956, the ·Life Insurance Corporation
Act, 1956, was brought into force.
By s. 7 of that
Act on the appointed day all the assets and liabilities
appertaining to the 'controlled business' of all
insurers were to stand transferred to and vested in
Life In•urance Corporation of India. The expression 'controlled business' meant, amongst others, in
the case of any insurer specified in sub-cl; (a) (ii) of
sub·cl. (b) of cl. (9) of s. 2 of the Insurance Act and
carrying on life insurance business all his business if
he carries on no other class of insurance business.
September 1, 1956 was notified as the 'appointed
day', and on that day, all the assets and liabilities of
insurers including the Company stood transferred to
and vested in the Life Insurance Corporation. On
September 30, 1957, the Life Insura.nce Corporationwhich will hereinafter be referred t,o as 'the Corporation' -called upon the appellants to refund the
amount of Rs. 2 lakhs received by the trust from the
Company in December, I 955, and the ap~ellants by
their letter dated December 10, l!J57, having denied
liability to refund . the amount, the Corporation
applied on March 14, 1958 to the Life Insurance
Tribunal constituted under the Life Insurance
Corporation Act for an order that the trustees be
ordered jointly and severally to pay to the Corporation
the sum of Rs.2 lakhs with interest thereon at the rate
of six per cent per annum from the date of oavment
1962
Dr. A. Ldslinuzn•~
swami Mud4liar
v.
Life Insurance
Corp•. of Irulia
Slt•h, J,
1162
Dr. A, Laks~mllfla•
.fwami Mudaliar
...
Lift lnsuran&1
Corpn. ef India
Sliah, J,
892 SUPREME COURT REPORTS [1963]SUPP.
to the trustees. It was alleged by the Corporation
that the resolution dated July 15, 1!!55 as well as the
payments made in p1irsuance thereof were ultra vires
the Company and void and of no effect in law, that
the Memorandum of the Company did not authorise
such payment, that making of such a donation was
not in the interests of the Company's busine"ll nor
was it a generally recognised method of conducting
the business and by the donation no direct or substantial advantage accrued to the Company. The
appellants by their written statement submitted that
the Directors of the Company were authorised by the
Articles of Association of the Company to make
donations towards any charitable or benevolent object
or for any public, general or useful object, that the
amount of Rs. 2 lakhs was paid out of the Shareholders Dividend Account which was distinct and
separate from the general a~sets of the Company, and
under the Articles of Association money standing to
the credit of the 'Shareholders' Dividend Account
being the exclusive property of the shareholders and
not of the Company, was held by the Company for
and on behalf of the shareholders and in trust for them;
that the shareholders had absolute right of disposal
over the said account and the shareholders of the
Company having resolved to donate Rs: 2 lakhs to
the trust out of that account in exercise of their
absolute ownership and power of disposal over the
said fund, the payment could not be called in
question by the Company or by any body purporting
to act on behalf of the Company, for if the Company
had not been taken over by the Corporation, the
impugned payment could not have been challenged
as ultra
vire.~, and the powers of the Corporation
were not larger in scope and ambit than that of the
Company. The appellants also contended that as
trustees they were not personally liable to refund the
amount claimed.
By
order dated December 20, 1958, the
Tribunal directed the appellants to pay jointly and
2 s.c.R.
SUPREME COURT REPORTS
893
severally Rs. 2 lakhs within fifteen days from the
date of service of the order, and in default to pay
interest thereon at the rate of 6 per cent per annum
till the date of realisation.
Against the order, this
appeal with special leave is filed.
The right of the Corporation to demand payment of the amount if the resolution sanctioning
payment was unauthorised, cannot be challenged in
view of the express provision in s. 15 of the Life
Insurance Corporation Act.
Under s. 15 (1) (a) of
Life Insurance Corporation Act, 1956, where an
insurer whose controlled business has been transferred
to and vested in the Corporation under the Act, has
at any time within five years before the 19th day of
January, 1956, made any_ payment to any person
without consideration, the payment not being reasonably necessary for the purpose of the controlled business of the insurer or has been made with an unreasonable lack of prudence on the part of the
insuter~~ regard being had in either case to the
circumstances at the time, the Corporation may
apply for relief to the Tribunal in respect of such
transaction; and by cl. (2) the Tribunal is authorised
to make such order against any of the parties to the•
application as it thinks just having regard to the
extent to which those parties were respectively responsible for the transaction or benefited from it and
all the circumstances of the case.
It is necessary in the first instance to ascertain
the true effect of the resolution dated July 15, 1955,
and the character of the Shareholders' Dividend
account.
The material clauses of the Articles of
,-..:'"
Association of the Company relating to the constitution of the Shareholders' Dividend Account are Arts.
l lll and 117. Article 1 W reads :
"Interest on the paid-up capital at the rate of
six per cent per annum simple for each of the
1962
Dr. A. L.J.Juna111•
swami Mudaliar
v.
Life Iruurance
Corpn. of ln:li ~
Sliah, J,
1962
Dr. A. Lakslrmana·
swami Mudalior
v.
Life Insuraoce
c.,pn. of Indio
894 SUPREME COURT REPORTS [W63] SUPP.
years covered by the Valuation Period sh all
from a first charge on and be deducted from the
surplus remaining; and the said amount shall
become the exclusive property of the share·
holders and shall be carried over to the Shareholders' Dividend Account."
Article 117 reads :
"Of the remaining surplus the shareholders
shall be entitled to a one-tenth share and the
amount representing the said one-tenth share
shall also thenceforth become the exclusive
property of the shareholders and be carried over
to the Shareholders' Dividend Account."
Article 119 provides for payment of dividend and or
bonus out of the Shareholders' Dividend Account.
That article states that :
"Dividend and or bonus shall be declared and
paid to the shareholders in proportion to the
paid-up capital from and out of the total
amount remaining in the Shareholders' Dividend Account in accordance with the provi~ions
of the Articles."
•By Article 12:! it is provided that no larger dividend shall be declared than is recommended by the
Directors, but the Company in a general meeting may
declare a smaller dividend. By Article 124 no dividend is payable to the shareholders except out of the
surpl•Js of the Company and such dividend shall not
be paid except from the amount in the Shareholders'
Dividend Account.
By the resolution passed by the Company on
July 15, 1955, it was resolved to donate Rs. 2 lakhs
to the Trust. Undoubtedly the amount was payable
out of the Shard10lders' Dividend Account : but by
the impugned resolution no dividend was declared.
Every resolution of the Company directing payment
out of the Shareholders' Dividend Account is not a
2 S.C.R.
SUPREME COURT REPORTS
895
resolution declaring dividend. The Directors have
to recommend payment of dividend at a certain rate,
and a resolution declaring dividend so recommended
or at a smaller rate may alone b~ p.issed.
The
directors had at the same meeting recommended
payment of an interim dividend (free of income tax)
at Rs. 50/· per share on the paid·up capital of the
Company, and it was resolved that dividend at the
rate be paid out of the Shareholders' Dividend
Account in respect of all shares to such persons as
were registered as holders of shares. The impugned
resolution was therefore one donating an amount to
the trust, and not dc~laring dividend payable on
behalf of the sharcholde1s to the trust.
Constitution of a separate Shareholders' Dividend Account in Life Insurance Companies was
necessitated because of s. 49 of the Insurance Act,
H138, which prohibited insurers of certain classes
(and the Company is an insurer of that class) from
carrying on the business of life insurance, from utiliz·
ing directly or indirectly any portion of the life
insurance fund or of the fund of such other class or
sub-class of insurance business, as the case may be,
for the purpose of declaring or paying any dividend
t() shareholders or any bonus to
policy-holders
or of making any payment in service of any
debentures, except a surplus shown in the valuation
balance-sheet in Form I as set forth in the Fourth
Schedule submitted to the Controller as part of the
abstract referred to in s. 15 as a result of an actuarial
valuation of the assets and liabilities of the insurer.
By sub-section (1) of s. 10, every insurer carrying on
life insurance business was required to maintain a
s~parate fund of receipts due in respect of such busi·
ness a separate fund distinct from all other assets of
the insurer, a,1d deposit5 made by the insurer in
respect of life insurance ··business were to be deemed
parts of the assets of such fund. By sub ·section (3) the
life insurance fund wa1 made absolutely the security
1962
Dr. A. Laksiun<M.
swami Mud.,litJr
v.
Life /llSUf_,
Corpn. of India
Shah, J.
1962
Dr. A. Laksllmanaswatni 1Wudaliar
v.
Lif1 /11suranc1
Corp.. of lnJia
Sltah, J.
8!16 SUPREME COURT REPORTS [1963] SUPP.
of the life insurance policy holders, and could not be
applied directly or indirectly for purposes other than
those of the life insurance business. Bys. 13 every
such insurer was required to cause an investigation to be made in respect of all life insurance business transacted by him once in three years by an
actuary into the financial condition of the business,
including a valuation in respect thereto and 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.
By the Fourth Schedule in Part I various regulations
for the preparation of abstracts of actuaries reports
are laid down and Part II prescribes requirements
applicable to an abstract in respect of life insurance
business.
To maintain a reserve account for payment of
dividends, Articles 116 and 117 provide that out of
the surplus shown in the valuation Balance-Sheet,
interest on the paid-up capital at the rate of 6 per
cent per annum for each of the years covered by
the valuation period and of a ten per cent share of
the remaining surplus shall be set apart and be
ca1Tied over to the Shareholders' Dividend Account.
The scheme of the two Articles is that the surplus
is to be allocated
first
to
the
shareholders
for the percentages prescribed, and then to the
policy-holders,
and by
Art. 124
divided
is
made payable only out of the surplus, which is included in the Shareholders' Dividend Account. By
Arts. 116 and 117 the amounts so · set apart arc
declared to be the exoluBive property of the Bh'lreholders, that however docs not create in the indivi-
"-
dual shareholders and proprietary interest in the
Shareholders' Dividend Account. Until divideud
is declared, the shareholders have no right to parti•
cipate in the fund. The expression 'exclusive property of hte shareholders' only emphasizes that in
,
2 S.C.R.
SUPREME COURT REPORTS
897
the Shareholders' Dividend Account the policy-holders
ha vc no interest : it means that the fund is divisible only among shareholders, policy-holders having
no right to participate therein.
However unit
dividend is declared, the shareholders do not become
creditors of the Company for a fractional share in
the Fund proportionate to the value of their holding.
As observed hy this Court in Bacha F'. Guzrl11r v.
Commissioner of lncome·t11x, Bombny ('):
"The true position of a shareholder is that on
buying shares an fovestor becomes entitled to
participate in the profits of the company in
which he
holds the shares if and when the
company declares, subject to the Articles of
Association, that the profits or any portion
thereof should be distributed by way
of
dividends among the· shareholders.
He has
undoubtedly a further right to participate in
the assests of the company which would be
left over after winding up but not in the assets
as a whole."
The fund, therefore, belongs to the Company, and continues to so belong until its destination is determined
by a resolution of the Company declaring a dividend
pursuant to a recommendation of the Directors. The
scheme of the Articles of Association of the Company
makes this abundantly clear.
The power to declare
a dividend is given by Arts. 122 & 123 to the
Company in general meeting, but no larger dividend
can be declared than what is recommended by the
Directors. The right to dividend therefore depends
upon the recommendation to be made
by the
Directors and unless there is a recommendation made
by the Directors and the general meeting declares a
dividend, the shareholders acquire no right to the
fund or any part thereof, out of which dividend is
when declared payable.
01 [195~1 1 s.c.R. 876.
1962
Dr. A. Lakslun1111a·
swMni Mutfalisr
v.
Lif1 lnnrante
Corpn. of India
Sh<h, J.
1962
Dr. A. Loksl1mmuiswami Mudaliar
v.
lif1 ltuuranu
c_,pn. oj India
Shah, J,
898 SUPREME COURT REPORTS [1963) SUPP.
The argument of counsel for the appellants
that the meeting held on July 15, 1955, was a
meeting of the sharrholders, and when the share·
holders resolved to donate an amount of Rs. 2 lakhs
out of the Shareholders' Dividend Account they must
be deemed to have resolved upon the destination of
a part of the Fund to which they were entitled, has
therefore no force.
The meeting was a meeting of
the Company specifically convened for considering
various resolutions one of which was to make a
donation of Rs. 2 lakhs out of the Shareholders'
Dividend· Account. Dividend is by the Articles
undoubtedly payable out of the
Shareholders'
Dividend Account, but until a resolution is passed
by the Company in a general meeting, no part of
the Account belongs to the shareholders as dividend.
It is common ground that no resolution was passed
declaring that the amount of Rs. 2 lakhs be declared
as dividend and paid over to the shareholders.
The contention raised by counsel for the appellants that the resolution of the Company and the
acceptance thereof by the appellants as trustees of the
Trust constituted a contract is, in our judgment,
futile. There was within the meaning of the Indian
Contract Act no consideration m::>ving from the trustees for accepting the amount assuming that the resolution amounted to an offer. Bys. 2 cl. (d) of the
Indian Contract Act when at the desire of the promisor, the promisee or any other person has done or
abstained for doing, or does or abstains from doing,
or promises to do or abstain from doing, something, such act or abstinence or promise is called a
consideration for the promise. Mere willingness to
utilise the monies for the purpose of the trust cannot
be regarded as consideration, for consideration to
support an agreement must be valuable. In the
case before us even before the trust came into existence the Directors of the Company entertained a
desire to make a donation in favour of the trust to be
'
2 S.C.R.
SUPREME COURT REPORTS
899
constituted, and a resolution of the Company sanctioning the donation was passed. When the trust
deed was executed ~he Directors paid
ovrr the
amount pursuant to the resolution to the trust. By
mere acceptance of the amount donated no consideration was rendered by the trust in favour of the Company. Payment by the Company of the amount resolved to be donated was therefore purely gratuitous:
its acceptance made it a gift, and did not give rise
to a contract.
A Company is competent to carry out its objects
specified in the Memorandum of Association and
cannot travel beyond the objects. The objects of
the Company are set out in Cl. III. By the first subclause the Company is authorised to carry on life
insurance business in all its branches and all kinds
of indemnity and guarantee business and for that
purpose to enter into and carry into effect all contracts and arrangements. By sub-cl. (ii) the Company is authorised "to invest and deal with funds
and assets of the Company upon such securities or
investments and in such manner as may from time to
time be fixed by the Articles of Association of the
Company." Sub-clauses (iii) and (iv) are not material
for the purposes of this appeal. By sub-clause (v) the
Company is authorised to do "all such other things
as are incidental or conducive to the attainment of
the above objects or any of them." The Memorandum of Association must like any other document be
construed according to accepted principles applicable
to
the interpretation of all legal
documents
and no rigid canon of construction is to be applied
to such a document.
Like any other document, it
"
must be read fairly and its import derived from a
reasonable interpretation of the language which it
employs.
Egyptian Salt & Soda G<.rmpany v. Port
Said Salt Association (').
As observed in Ashbury
Railway Carriages and Iron Company v. Riche (1) •
"The covenant, therefore, is not merely that
1962
Dr. d.Laks/imtJ1111o
sWiimi Mudaliar
••
Life lnsutat1ce
Cor/111. of India
shai., J.
(1) (1931] A.C. 677,
(2) (187~) L.R. 7 H.L. 653.
1ff2
/Jr. A. Lo!<lf111,.,,..
sl.Nmi MuUliar
••
Lifi !•"""""
c.,.,,,. •J lniia
Shh, J.
000 SUPREME COURT REPORTS [1963) SUPP.
every member will observe the conditions upon
which the company is establis.hcd, but that no
change shall be made in those conditions; and
if there is a covenant that no change shall be
made in the objects for which the company is
established, I apprehend that that includes
within it the engagement that no object shall
be pursued by the company, or attempted to be
attained by the company in practice, except an
object which is mentioned in the memorandum
of association.
Now, my Lords, if that is so-ifthat is the
condition upon which the corporation is established -it is a mode of incorporation which contains in it both that which is affirmative and that
which is negative. It states affirmatively the ambit and extent of vitality and power which by law
are given to the corporation, and it states, if it
is necessary so to state, negatively, that nothing
shall be done beyond that ambit, and that no
attempt shall be made to use the corporate life
for any other purpose than that which is so
specified."
Power to carry out an object, undoubtedly includes power to c lrry out what is incidental or conducive to the attainment of that object, for such extension merely permits mmething to be done which is
connected with the objects to be attained, as being
naturally conducive thereto. By sub-clause (i) of
cl. III of the objects clause of the Memorandum of
Association, the (;ornpany is to carry on the life insurance business in all its branches. Clause (ii) authorises the Company to invest and deal with funds and
assets of the Company upon such securities or investments and in such manner as may from t;me to time
be fixed by the Articles of Association of the Company. This is in truth not an object clause, it is a
dause aμtborising investment <;>f funds. Clause (ii)
2 S.C.R.
SUPREME COURT REPORTS
901
does not invest the Directors with power to deal with
the funds in such manner as mav from time to time
be fixed by the Articles of Association: power conferred thereby is power to invest and deal with funds
and assets of the Company. The Directors under
sub-clause (ii) of cl. III merely have the power to
invest and deal with the funds and assets of the
Company upon such securities or
investments,
and the power is to be exercised in the manner
prescribed by the Articles
of Association. By
Article 93 (t) the Directors arc undoubtedly invested
with authority to establish, maintain and subscribe
to any institution or Society which may be for the
benefit of the Company, and to "make payments
towards any charitable or any benevoknt object,
or for any general public, general or useful object".
But this is within the authority of the Directors only
if the Company has the power under the Memo·
randum of Association to achieve the object specified, or for doing anything incidental to or naturally
conducive to objects specified. If the object is not
within the competence of the Company, the Direc·
tors relying upon Art. 93 (t) cannot expend the funds
of the Company for achieving that object. The
primary. object of the Company is to carry on life
msurancc business in all its branches, and donations
of the Company's funds for the benefit of a trust
for charitable purposes is not . incidental to or
naturally conducive to that object.
There is in fact
no discernible connection between the donation and
the objects of the
Company. Undoubtedly the
Memorandum of Association has to be read ·together
with the Articles of Association, where the terms
are ambiguous or silent.
As observed in Angostura
Bitters & Company LU. v. Kc rr (1) by the J udical
Commilte of the Privy Council :
"that except in respect of such matters as must
by statute be provided for by the memorandum, it is not to be regarded as the dominant
(I I [1933] A.O. 550.
/J62
Dr . ..4. lclalunana~
swami Mutlalia
••
Lif1 luuraMe
Cor;o. ef Indio
Shoh, /.
'
1962
Dr • .A. Lahlun'.llla·
swami Mutlaliar
••
Life lnsuranct
Corpn. of buiia
Shah, J.
902 SUPREME COURT REPORTS [1963] SUPP.
document,
but is to be read in conjunction with the articles: Harrison v.
.Mexican
Rly. Go. ((1875) L. R. 19 Eq. 358); Anderson's
case ((1877) 7 Ch. D. 75) ; Guinness v. Land
Corporation of Ireland
( (1882) 22 Ch. D.
349) ; In re.
South Durham Brewery Go.
((1885) 31
Ch. D. 261). Their Lordships
agree that in such cases the two documents
must be read together at all events so far as
may be necessary to explain any ambiguity
appearing in the terms of the memorandum,
or to supplement it upon any matter as to
which it is silent."
There is however no ambiguity in the relevant
terms of the Memorandum of Association. Clause
III of the Memorandum deals with the objects, and
powers of the Company in language which is reasonably plain.
The Articles may explain the
Memorandum, but cannot extend its scope. Subclause (v) merely authorises the Company to do all
such other things 'as are incidental or conducive to
the attainment of tht> above objects or any of them'.
The clause mdely sets out what is implicit in the
interpretation of every Memorandum of Association :
it does not set up any independent object, and confers no additional power. Acts incidental to or
naturally conducive to the main object are those
which have a reasonably proximate connection with
the object, and some indirect or remote benefit which
the Company may obtain by doing an act not otherwise within the object clause, will not be permitted
by this extention. In T01nkinson v. Rauth Eastern
Railway (') it was held that a resolution passed by
the shareholders of a Railway Company authorising the Directors to subscribe
£ 10110 out of the
Company's funds towards a donation to the Imperial Institute was ultm i•ire8, even though the
establishment of the Institute would benefit the
Company by causing an increase in passenger traffic
-
2 S.C.R.
SUPREME COURT REPORTS
903
over their line. Kay, J., announcing the judgment
of the Court observed :
.
"Now, what is proposed to be done here is this :
the chairman of the railway company, at a
meeting of the company, proposed this re·
solution : 'That the directors be authorised,
either by way of donation from the company
or by an appeal to the proprietors, as they
may be advised'-the resolution thus proposing two
alternative modes-'to subscribe
the sum of£ 1000 to the Imperial Institute'.
I pause there. The Imperial · Institute has no
more connection with this railway company"
than the present exhibition of pictures at
Burlington House, 01 the Grosvenor Gallery,
or Madame Tussaud's, or any other institution
in London' that can be mentioned. The only
ground for the suggestion that this company
has the right to apply its funds, which it has
been allowed to raise for specific purposes, to
this purpose is, that the Imperial Institute, if
it succeeds, wiJI very probably greatly in·
crease the traffic of this company. If that is
a good reason, then, as I pomted out during
the argument, any possible kind of exhibition
which, by being established in London, would
probably increase the traffic of a railway
company by inducing people to come up to
see it would be an object to which a railway
company might subscribe part of its funds.
I never heard of such a rule, and, as far as I
understand the Jaw, that clearly would not be
a proper application of the moneys of a railway
company. I cannot distinguish this case from
that at all, though, of course, I do not mean to
disparage the enormous importance of the
Imperial Institute. It may be established for
the highest possible objects of interest 1to this
country; but still, the only reason givev ·to me
1962
Dr. A I..iksl1111ana·
swami Afudaliar
••
Life Insurance
Co1pn. of lndi'I
Shafi, J.
1962
Dr. A. Lakshm<na·
swanti MuJoliar
v.
Lif1 Insurance
Corpn. of India
Shah, J,
904 SUPREME COURT REPORTS [1063] SUPP.
why this railway company thinks it right to
spend part of its funds in subscribing to it is
this, that it will probably greatly increase the
traffic of the company by
inducing many
people to travel up to visit this Institute. I
cannot accept that as a reason for a moment."
The trust has numerous
objects one of
which is undoubtedly to promote art, scie!'ce, in·
dustrial, technical or business knowledge including
knowledge in banking, insurance, commerce and
industry. There is no obligation upon the trustees
to utilise the fund or any part thereof for promoting
education in insurance, and even if the trustees
utilised the fund for that purpose, it was problematic
whether
any such persons trained in insurance
business and practice were likely to take up employ·
ment with the Company. Thus the ultimate bene·
fit which may result to the Company from the
availability of personnel trained in insurance, if the
trust utilises the fund for promoting education in
insurance practice and business, is too indirect, to be
regarded as incidental or naturally conducive lo the
object of the Company. We are, therefore, of the
view that the resolution donating the funds of the
Company was not within the objects mentioned in
the Memorandum of Association and on that account
it was ultm vires.
Where a Company does an act which is iiltra
vires, no legal relationship or effect ensues therefrom.
Such an act is absolutely void and cannot be ratified even if all the shareholders agree. lle. Birkbnck
Permanent Benefit Building Society (1).
The payment made pursuant to the resolution was therefore unauthorised and the trustees acquired no right
to the amount paid by the Directors to the trust.
The only question which remains to be considered is whether the appellants were personally liable
to refund the amount paid to them.
Appellants
(1) [1912) 2 Ch. 163.
--
i •
I
I
.. -
2S.C.R.
SUPREME COURT REPORTS
905
2 and 4 were at the material time Directors of the
Company and they took part in the meeting held
under the Chairmanship of the fourth appellant in
which the resolution, which we have held ultra vires,
was passed.
As office bearers of the Company who
were responsible for passiug the resolution ultra vires
the Company, they will be personally liable to make
good the amount belonging to the Company which
was unlawfully disbursed in pursuance of the resolution.
Again bys. 15 of the Life Insurance Corporation Act, 1956 the Life Insurance Corporation is
entitled to demand that any amount paid over to any
person without consideration, and not reasonably
necessary for the purposes of the controlled business
of the insurer be ordered to be refunded, and by
sub-section (2) authority is confrrred upon the Tribunal to make such order against any of the parties to
the application as it thinks just having regard to the
extent to which those parties were respectively respon·
sible for the transaction or benefited from it and all
the circumstances of the case.
The trustees as
representing the trust have benefited from
the
payment. The amount was, it is common ground,
not disposed of before the Corporation demanded it
from the appellants, and if with notice of the infir·
mity in the resolution, the trustees proceeded to deal
with the fund to which the trust was not ligitimately
entitled, in our judgment, it would be open to the
Tribunal to direct the trustees personally to repay the
amount received by them and to which they were
not lawfully entitled.
The appeal therefore fails and is dismissed with
costs.
Appeal dismissed .
1962
Dr. A. L.ks/imaa
swami Murlaliat
v.
Life lnsuranre
Co1pn. of India
Shah, J