DR. A. LAKSHMANASWAMI MUDALIAR V. LIFE INSURANCE CORPORATION OF INDIA, AIR 1963 SC 1185

A. LAKSHMANASWAMI MUDALIAR V. LIFE INSURANCE CORPORATION OF INDIA, AIR 1963 SC 1185

 

FACTS

• The United India Life Assurance Company Ltd. (‘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.
• The United India Life Insurance Company limited had an extraordinary general meeting where a resolution was passed, among other matters, to sanction a donation of rupees 2,00,000 from out of the share.
• Life Insurance Corporation Act came into force on 1st July, 1956 where one of the provisions was related to appointing all the assets and liabilities related to the control of business of insurance vested in the Life insurance corporation.
• The expression ‘controlled business’ meant, amongst others, in the case of any insurer specified in sub-cl. (a) (ii) or 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.
• On September 30, 1957 the Life Insurance Corporation – which will hereinafter be referred to as ‘the Corporation’ – called upon the appellants to refund the amount of Rs. 2 lakhs received by the trust from the Company in December, 1955 and the appellants by their letter dated December 10, 1957 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 payment to the trustees.
• It was alleged by the Corporation that the resolution dated July 15, 1955 as well as the payments made in pursuance 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 business 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 Tribunal directed the appellants to pay the amount of Rs 2 lakhs with interest. Dissatisfied with this decision, the appellants filed for special leave.

 

ISSUE

• Whether the donation was an ultra vires act of the company?
• Whether the appellant is personally liable to pay a refund?

 

HELD
The Court dismissed the appeal and held that resolution was beyond the MoA and ultra vires and the company will be personally liable to refund the amount. 

• The Court emphasised that a company must operate within the confines of its MoA, adhering strictly to its stated objects.
• It was discussed that by the virtue of 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 sec.
• Secondly, authority is conferred 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 responsible for transaction or benefited from it and all the circumstances of the case.
• 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.

 

COMMENTARY
“In India the origin of the doctrine of ultra vires dates back to 1866 when the Bombay High Court applied it to a joint stock company and held on the FACTS of the case before it that "the purchase by the directors of a company, on behalf of the company, of shares in other joint stock companies, unless expressly authorised in the memorandum is ultra vires".Since then the rule has been applied and acted upon in a number of cases. The doctrine has been affirmed by the Supreme Court in its decision in A Lakshmanaswami Mudaliar v LIC. The payment was held to be ultra vires. The court said that the directors could not spend the company's money on any charitable or general object which they might choose. They could spend for the promotion of only such charitable objects as would be useful for the attainment of the company's own objects. The company's business having been taken over by the Life Insurance Corporation, it had no business left to promote.”