Case: Dr. A. Lakshmanaswami Mudaliarand Others Vs. Life Insurance Corporation

2. 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 the Company, the following resolution, amongst others, was passed :"Resolved that a donation of Rs.2 lakhs be sanctioned from out of the Share-holders 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 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. 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 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 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 lecturerships, 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, 1956the Life Insurance Corporation Act, 1956was 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 percent 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 Companys 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 Divident Account which was distinct and separate from the general assets of the Company, and under the Articles of Association money standing 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 are 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 service of the order, and in default to pay interest thereon at the rate of 6 percent per annum till the date of realisation. Against the order, this appeal with special leave is filed.

Court's reasoning:
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) ofthe Life Insurance Corporation Act, 195610. The argument of counsel for the appellants that the meeting held on July 15, 1955 was a meeting of the share-holders, and when the share-holders resolved to donate an amount of Rs. 2 lakhs out of the Share-holders 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 Dividend Account. Dividend is by the Articles undoubtedly payable out of the Share-holders Dividend Account, but until a resolution is passed by the Company in a general meeting, no part of the Account belongs to the share-holders as dividend. It is common ground that no resolution was passed declaring at the amount of Rs. 2 lakhs be declared as dividend and paid over to the share-holders16. 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.Re. Birkbeck Permanent Benefit Building Society, (1912) 2 Ch. 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 trustAppellants 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 ofthe Life Insurance Corporation Act, 1956the 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. (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.