A. Lakshmanaswami v. Life Insurance Corporation of India AIR 1963 SC 1185

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J.C. SHAH, J. – 2. 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. 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 Dividend Account to the M. Ct. M. Chindambaram Chettyar Memorial 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 the Trustees of the aforesaid Trust when it is formed.”
On the date of this resolution, appellants 2 and 4 were directors of the Company,
appellant 4 being the Chairman of the Board of Directors. On December 6, 1955 five settlors
(including the Company) executed a deed reciting that the settlors desired to establish a
charitable trust for commemorating the name of the Late M. Ct. M. Chindambaram Chettyar
“befitting his services to various institutions and organisations 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 settlors 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 in 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 lecturships, to conduct competitions, to test
proficiency in the art of essay writing or speaking, “to promote art, science, industrial,
technical or business knowledge including knowledge in banking, Insurance, commerce and
industry”, to establish 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 educational institution or libraries in India for imparting general, technical or
scientific knowledge and to give subscriptions or donations or to render financial assistance to
any educational or other charitable institution in India.

3. Appellants 2, 3 and 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 pursuance of the resolution
   dated July 15, 1955 the Directors of the Company made an initial instalment of Rs. 5,000/- to
   the trustees and the balance 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 the Life Insurance Corporation of India.
   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.
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 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 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 assets 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 the 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 vires, 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.

4. By order dated December 20, 1958 the Tribunal directed the appellants to pay jointly
   and severally Rs. 2 lakhs within fifteen days from the date of serving 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.
5. 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 the 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 insurer; 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.

6. 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.
7. The argument of counsel for the appellants that the meeting held on July 15, 1955 was
   a meeting of the shareholders, and when the shareholders 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 Share-holders’
   Divided Account.
8. 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 sub-cl. 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-clause (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-cl. (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.
9. Power to carry out an object, undoubtedly includes power to carry out what is
   incidental or conducive to the attainment of that object, for such extension merely permits
   something to be done which is connected with the objects to be attained, as being naturally
   conducive thereto. By sub-cl. (i) of cl. III of the objects clause of the Memorandum of
   Association, the Company is to carry on 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 time to time be fixed by the
   Articles of Association of the Company. This is in truth not an object clause, it is a clause
   authorising investment of funds. Clause (ii) does not invest the Directors with power to deal
   with the funds in such manner as may 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-cl. (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 are 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 benevolent 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 Memorandum of Association to achieve the object specified, or for doing
anything incidental to or naturally conducive to the objects specified. If the object is not
within the competence of the Company, the Directors relying upon Art. 93 (t) cannot expand
the funds of the Company for achieving that object. The primary object of the Company is to
carry on life insurance 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 Ltd. v. Kerr [AIR 1934 PC 89], by the Judicial Committee 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 document, but is to be read in
conjunction with the articles : Harrison v. Mexican Rly. Co. [(1875) 19 Eq. 358];
Anderson case; In re, Wedgwood Coal and Iron Co., [(1877) 7 Ch. D. 75]; Guinness v.
Land Corporation of Ireland [(1882) 22 Ch. D. 349]; In re, South Durham Brewery Co.
[(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”.

10. 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. Sub-clause (v) merely authorises the Company to do all such
    other things “as are incidental or conducive to the attainment of the above objects or any of
    them”. The clause merely 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 extension. In Tomkinson v. South Eastern Railway, [(1887) 35 Ch. D.
    675], it was held that a resolution passed by the shareholders of a Railway Company
    authorising the Directors to subscribe £ 1000 out of the Company’s funds towards a donation
    to the Imperial Institute was ultra vires, even though the establishment of the Institute would
    benefit the Company by causing an increase in passenger traffic 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 resolution. ‘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, or 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, will very probably
greatly increase the traffic of this company. If that is a good reason, then, as I pointed 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 law, 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 to this country; but still, the only reason given to me 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”.

11. The trust has numerous objects one of which is undoubtedly to promote art, science,
    industrial, 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 employment with the Company. Thus the ultimate benefit
    which may result to the Company from the availability of personnel trained in insurance, if
    the trust utilises the fund for promoting education, insurance, practice and business, is too
    indirect, to be regarded as incidental or naturally conducive to the objects 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
    ultra vires.
12. Where a Company does an act which is ultra vires, no legal relationship or effect
    ensues therefrom. Such an act is absolutely void and cannot be ratified even if all the
    shareholders agree. 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.
13. The only question which remains to be considered is whether the appellants were
    personally liable to refund the amount paid to them. Appellants 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 responsible for passing 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 by S. 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 subsec. (2) 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. 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 infirmity in the resolution, the trustees proceeded to deal with the
fund to which the trust was not legitimately 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.