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Home > SC > Corporate Law > Life Insurance Corporation Act > DR. A. LAKSHMANASWAMI MUDALIARAND OTHERS Vs. LIFE INSURANCE CORPORATION



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DR. A. LAKSHMANASWAMI MUDALIARAND OTHERS Vs. LIFE INSURANCE CORPORATION

Posted on 24 June 2009 by jyoti

Title

DR. A. LAKSHMANASWAMI MUDALIARAND OTHERS Vs. LIFE INSURANCE CORPORATION



Coram

SINHA, BHUVNESHWAR P.(CJ), GAJENDRAGADKAR, P.B., WANCHOO, K.N., GUPTA, K.C. DAS, SHAH, J.C.



Act

Life Insurance Corporation Act



Subject

Insurance Company-Donation by Directors-If ultra vires-
Shareholders' Dividend Account-Proprietary right; if in
shareholders - Memorandum of Association - Conatruction-
Liability of Directors-Life Insurance Corporation Act, 1956
(31 of 1956), 8. 15.





Citation

1963 AIR 1185, 1963( 2 )Suppl.SCR 887, , ,



Head Notes

On July 15, 1955, at an Extraordinary General Meeting of the
shareholders of the United India Life Assurance Company
Ltd., a resolution was passed, among other matters
sanctioning a donation of Rs. 2 lakhs from out of the Share.
holders' 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 1, 1956, the Life Insurance Corporation Act came
into force by the provisions 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. BY s. 15(l)(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 relief in respect of the payments of Rs. 2
lakhs by the Company to the appellants on the ground that
the said payment was ultra vires the powers of the company
and was not reasonably necessary 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 Shareholders' Dividend Account provided for
by the Articles did not confer any proprietary interest on
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 with. out which the shareholders acquire no right
to. the fund or any part thereof.
Bacha P. Guzdar v. Commissioner of Income-tax, Bombay,
[1955] 1 S.C.R. 876, referred to.
Held, further, that the meeting in which the resolution was
passed was a meeting of the Company &ad it could not be
contended that it was a meeting of the shareholders in their
individual capacity.
Held, further, that the resolution of the company and the
acceptance by the appellants of the amount did not
constitute a contract there being no consideration to
support it.
Held, further, that the object of the company viz. to I 'in-
vest and deal with funds and assets of the company upon such
securities or investments" could not authorise the making of
the donation and such a power which was not expressly pro-
vided for 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. HI L. 653, referred to.
Held, further, that the resort to the Articles of
Association for the purpose of construing the Memorandum was
permissible only on matters regarding which the Memorandum
was silent or ambiguous.
Angostura Bitters & 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 was not within the power of the
company.
Tomkinson v. South Eaatern Railway, (1887) 35 Ch, D, 675,
referred to,
Held, also, that the action of the Company being ultra
vires, it created no legal effect and could not be ratified
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.



Judgment Made On

12/11/1962

JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 400 of 1961.
Appeal by special leave from the order dated December 20,
1958, of the Life Insurance Tribunal, Nagpur in Case No.
21/XV of 1958.
Purushottam Tricumdas, J.B. Dadachanji, O.C. Mathur and
Ravinder Narain, for the appellants.
C. K. Daphtary, Solicitor General of India,
G. S. Pathak, B. R. L. Iyengar, J. P. Shroff and
K. L. Hathi, for respondent No. 1.
1962. December I 1. The judgment of the Court was delivered
by
SHAH, 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
890
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 & 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. Chidambaram
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
891
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.
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 pursuance of the
resolution dated July 15, 1955, of 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 Life Insurance
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 Insurance Corporationwhich will hereinafter
be referred to as 'the Corporation'-called upon the
appellants to refund' the amount of Rs. 2 lakhs recei-ved 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
892
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 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
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.
By order dated December 20, 1958, the Tribunal directed the
appellants to pay jointly and
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 tent 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 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 res.
ponsible 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. 116 and 117. Article 116 reads :
"Interest on the paid-up capital at the rate of six per cent
per annum simple for each of the
894
years covered by the Valuation Period shall from a first
charge on and be deducted from the surplus remaining; and
the said amount shall become the exclusive property of the
shareholders 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' Divi-
dend Account in accordance with the provisions of the
Articles."
By Article 123 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 surplus 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 Shareholders'
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
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 be passed. 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 declaring dividend
payable on behalf of the shareholders to the trust.
Constitution of a separate Shareholders' Dividend Account
in Life Insurance Companies was necessitated because of s.
49 of the Insurance Act, 1938, which prohibited insurers of
certain classes (and the Company is an insurer of that
class) from carrying on the business of life insurance, from
utilizing 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 to 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 separate fund
of receipts due in respect of such business a separate fund
distinct from all other assets of the insurer, and deposits
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 was made absolutely the
security
896
of the life insurance policy holders, and could not be
applied directly or indirectly for purposes other than those
of the life insurance business. By s. 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
carried 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 are declared to be the
executive property of the shareholders that however does not
create in the individual shareholders and proprietary
interest in the Shareholders' Dividend Account. Until
dividend is declared, the shareholders have no right to
participate in the fund. The -expression "exclusive pro-
perty of the shareholders' only emphasizes that in
897
the Shareholders' Dividend Account the policy-holders have
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 by this Court in Bacha F. Guzdar
v. Commissioner of Income-tax, Bombay(1):
"The true position of a shareholder is that on buying shares
an investor 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 art thereof, out of which dividend
is when declared payable.
(1) [1955] 1 S.C.R. 876
898
The argument of counsel for the appellants that the meeting
held on July 15, 1955, was a meetingof 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 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 moving from the
trustees for accepting the amount assuming that the reso-
lution amounted to an offer. By s. 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
899
constituted, and a resolution of the Company sanctioning the
donation was passed. When the trust deed was executed the
Directors paid over 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 Company v. Port Said Salt Association (1). As
observed in Ashbury Railway Carriages and Iron Company v.
Riche (2)
The covenant, therefore, is not merely that
(1) [1931] A.C. 677,
(2) (1875) L.R. 7 H.L. 653.
900
every member will observe the conditions upon which the
company is established, 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 -if that is the condition upon
which the corporation is establi. shed -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
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-
clause (i) of cl. III of the objects clause of the
Memorandum of Association, the Company 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 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)
901
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-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 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 objects
specified. If the object is not within the competence of
the Company, the Directors 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
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 &Company Ltd.
v. Kerr(') by the judical 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
(1) (1933] A.C. 550.
902
document, but is to be read in conjunction
with the articles Harrison v. Mexican Rly.
Co. ((1875) L. R. 19 Eq. 358); Anderson's case
((1877) 7 Ch. D. 75) ; Guinness v. Land
Corporation of Ireland ((1882) 22 Ch. DI,
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."
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 extention. In
Tomkinson v. South Eastern Railway (1) it was held that a
resolution passed by the shareholders of a Railway Company
authorising the Directors to subscribe pound 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
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 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 pound 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, of 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
904
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, 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 in
insurance practice and business, is too indirect, to be
regarded as incidental or naturally conducive to 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 ultra vires.
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. Birkback 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. 183.
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
passing the, resolution ultra vires the Company, they will
be personall 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 Corpora-
tion 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 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 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
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 with costs.
Appeal dismissed.
906
POORAN CHAND
V.
MOTILAL & OTHERS
(S. J. IMAM, J. L. KAPUR., K. SUBBA RAO
and J. R. MUDHOLKAR JJ.)
Rent Control-Bevision-High Court, powers of-Illegal
subletting-If confined to first sub-letting-Delhi and Ajmer
Rent Control Act, 1952 (38 of 1952), 88. 13 (1) (b), 35.
The landlords executed a lease of a residential premises in
favour of the tenant for one year. More than a year after-
wards, the landlords gave the tenant a notice to quit and
filed a suit for his eviction inter alia on the ground that
he had sublet the premises without their consent. The
tenant resisted the suit on the grounds that the notice to
quit was illegal and that there was no illegal sub-letting
as contemplated by s. 13 (1) (b) of the Delhi and Ajmer Rent
Control Act, 1952, as he had merely inducted a new sub-
tenant in place of an old one. The trial Court decreed the
suit but on appeal the Civil judge dismissed it on the
ground that the notice to quit was invalid. The landlords
filed a second appeal before the High Court and the High
Court allowed the same holding that after the expiry of the
lease by efflux of time the tenant was a statutory tenant
and no notice to quite was necessary. The tenant contended
that no second appeal lay to the High Court and it could not
have interfered with the decree of the Civil judge in its
powers of revision under s. 35 of the Act and that there was
no illegal sub-letting.
Held, that even if a second appeal did not lie, the High
Court would have been justified in reversing the decree of
the Civil judge in exercise of its powers of revision under
s. 35 of the Act. The power of the High Court under s. 35
was wider than that under s. 115, Code of Civil Procedure,
though it could not be equated to that of its jurisdiction
in an appeal. It was neither possible nor advisable to
define with precision the scope and ambit of s. 35 but it
should be left to the High Court to consider in each case
whether the impugned judgment was according to law or not.
In the present case, since the tenancy had expired by efflux
of time, a notice to quit under s. 106, Transfer of Property
Act was not necessary but the Civil judge refused to pass a
decree -for - eviction on a wrong legal
907
basis that such notice was necessary. The decree of the
Civil judge was not "according to law" and the High Court
was justified in getting aside.
Hari Shankar v. Rao Girdhari Lal Chowdhury, [1962] Supp. I
S. C. R. 933 and Bell & Co. Ltd. v. Waman Hemraj, (1938) 40
Bom. L. R. 125, referred to.
Held, further, that the tenant had sub-let the premises
within the meaning of s. 13 (1) (b) (i) of the Act. This
section provides for eviction if a tenant' has sub-let,
assigned or otherwise parted with possession of the whole or
any part of the premises without the consent of the landlord
in writing. It was not confined to the first sub-letting
and it covered the case where there was already a sub-tenant
and a new sub-tenant was inducted when the previous one
left.
CiviL APPFLLATE JURISDICTION Civil
Appeal No. 624/1962.
Appeal by special leave from the judgment and decree dated
July 18, 1961, of the Rajasthan High Court in Civil Regular
Second Appeal No. 90 of 1960.
G. C. Mathur, for the appellant.
B. D. Sharma, for the respondents.
1962. December 11. The judgment of the Court was delivered
by
SUBBA RAO, J.-This appeal by special leave is directed
against the judgment and decree of the High Court of
judicature for Rajasthan at jodhpur setting aside those of
the Senior Civil judge, Ajmer, and restoring those of the
Subordinate Judge, First Class, Ajmer, decreeing the suit
for eviction from the suit premises filed by the respondents
against the appellant.
The facts may be briefly stated. The building situate at
No. 41 Purani Mandi, Ajmer, consists of a large number of
rooms., and the respondents are its owners. On October 13,
1935, the said building
908
was taken on lease by the appellant's father for a period of
one year on a rent of Rs. 50/- per month. On July 10, 1950,
the respondents gave a lease of the said building in favour
of the appellant for a period of one year on a rent of Rs.
65/- per month. On August 8, 1952, a fresh lease was
executed in favour of the appellant on an enhanced rent of
Rs. 70/- per month. Under the said lease the tenacy was to
commence from August I., 1952. On,' June 27, 1954, the
respondents issued a notice to the appellant, through their
Advocates, calling upon him to vacate the premises by
midnight of July 31, 1954/August 1, 1954. In that notice it
was alleged that the appellant was in arrears of rent and
that he had also sublet the property. In the reply notice
the appellant promised to pay the arrears of rent as early
as possible, but stated that he had all along been
subletting portions of the premises to others, except the
portion under his occupation. As the appellant did not
comply with the terms of the notice, the respondents filed
on August 2, 1954, Civil Suit No. 762 of 1954 in the Court
of the Subordinate Judge, First Class, Ajmer, against
the appellant for eviction, forrecovery of
arrears of rent and for other reliefs. The
plaint was later on amended. The appellant contested the
suit on various grounds and particularly on the ground that
it was not maintainable. It may be mentioned that in the
written-statement the fact that the premises were sublet to
tenants was not denied. The learned Subordinate judge
decreed the suit, holding that the notice was valid and that
the appellant was liable to be evicted under s. 13 (1) (b)
of the Delhi and Ajmer Rent Control Act, 1952 ( XXXVIII of
1952 ), hereinafter called the Act, as he had sublet
portions of the premises without the consent in writing of
the landlords On appeal the Senior Civil judge, Ajmer,
allowed the appeal. He held that the notice issued to the
appellant -was short by 24 hours and that he had no right to
sublet the premises without the written consent of the
landlord,
909
though there where sub-tenants in the premises when the
appellant took the lease. On second appeal, the High Court
allowed the appeal and restored the decree of the trial
court. The High Court held that the notice complied with
the provisions of s. 106 of the Transfer of Property Act,
1882, and that, in any event, as the tenancy expired by mere
efflux of time, no notice was necessary. Hence the present
appeal.,
us the following four points: (1) No second appeal lay to
the High Court against the decree and judgment of the Civil
judge; (2) if no second appeal lay against the decree and
judgment of the Civil judge, the High Court's power of
interference with that judgment was confined only to s. 35
(1) of the Act and that under that section it had no
jurisdiction to set aside the judgment on merits, whether of
law or of fact; (3) the High Court wrongly held that the
notice complied with the provisions of s. 106 of the
Transfer of Property Act, 1882; and (4) the High Court made
out a totally new case in holding that the tenancy had
expired by efflux of time.
It is not necessary in this case to express our opinion on
the first question, as we are satisfied that even if no
second appeal lay to the High Court against the judgmcnt and
decree of the Civil judge, the High Court had ample
jurisdiction to interfere in the circumstances of the case
under s. 35 (1) of the Act, which reads :
The High Court may, at any time, call for the record of any
case under this Act for the purpose of satisfying itself
that a decision made therein is according to law and may
pass such order in relation thereto as it thinks fit."
Reliance is placed by the learned counsel on a decision of
this Court in Hari Shankar v. Rao Girdhari Lal Chowdhury (1)
in support of the contention that
11962] Supp. I S.C R, 933.
910
the jurisdiction of the High Court under s. 35 of the Act is
very limited and does not warrant the High Court's
interference in the circumstances of this case. The main
question in that decision was whether the plaintiff
consented to the subletting of parts of the demised premises
and if so, when and to what effect ? The trial judge found
that there was no evidence that the landlord was ever
consulted. On appeal, the District judge confirmed that
finding. In revision, the High Court considered the
evidence over again and came to a contrary conclusion. In
that context this Court considered the scope of s. 35 of the
Act. Hidayatullah, J., expressing the majority view,
observed:
"The phrase "according to law" refers to the decision as a
whole, and is not to be equated to errors of law or of fact
simpliciter. It refers to the overall decision, which must
be according to law which it would not be, if there is a
miscarriage of justice due to a mistake of law. The section
is thus framed to confer larger powers than the power to
correct error of diction to which s. I 1 5 (of the Code of
jurisProcedure) is limited."
Then the learned judge quoted in extenso the observations of
Beaumont, C.J. (as he then was) in Bell & Co. Ltd. v. Waman
Hemraj (1) and recorded his full concurrence with those
observations. By those observations the learned Chief
justice gave certain illustrations and made it clear that
they were not exhaustive and concluded thus
"'But, in my opinion, the Court ought not to interfere
merely because it thinks that possibly the judge who heard
the case may have arrived at a conclusion which the High
Court would not have arrived at."
(1) (1938) 40 Bom. L.R. 125.
911
It is clear from the observations of Hidyatullah, J., and
those of Beaumont, C. J., which the former has fully
extracted, that the power of the High Court under 1st 35 of
the Act is wider than that under s. 115 of the Code of Civil
Procedure, though it cannot be equated to that of its
jurisdiction in an appeal. It is neither possible not
advisable to define with precision the scope and ambit of s.
35 of the Act, but it should be left to the High Court to
consider in each case whether the impugned judgment is
according to law or not, as explained by this Court in the
said decision,
Bearing the view expressed by this Court in mind we shall
proceed to consider whether the High Court had acted within
its jurisdiction. The main question turns upon the
construction of s. 13(l) of the Act. The material part of
the section reads :
"Notwithstanding anything to the contrary contained in any
other law or any contract, no decree or order for the
recovery of possession of any premises shall be passed by
any Court in favour of the landlord against any tenant
(including a tenant whose tenancy is terminated) :
Provided that nothing in this sub-section shall apply to any
suit or other proceeding for such recovery of possession if
the Court is satisfied-
(a) that the tenant has neither paid nor tendered the whole
of the arrears of rent due within one month of the date on
which a notice of demand for the arrears of rent has been
served on him by the landlord in the manner provided in
section 106 of the Transfer of Property Act, 1882 (IV of
1882); or
912
(b) that the tenant without obtaining the consent of the
landlord in writing has, after the commencement of this
Act,-
(i) sub-let, assigned or otherwise parted with the possess-
ion of, the whole or any part of the
premises..................
Learned counsel for the appellant contends that the
provisions of the said section are an additional protection
to a tenant and that they do not enable the landlord to
dispense with a statutory notice before filing a suit for
eviction, and in the present case the notice given did not
comply with the provisions of s. 106 of the Transfer of
Property Act, 1882. It is not necessary in this appeal to
express our opinion on the validity of this contention, for
we are satisfied that the term of the tenancy had expired by
efflux of time; and, therefore, no question of statutory
notice would arise. But the learned counsel contends that
this point was not raised either in the plaint or in the
lower courts, but was raised for the 'first time before the
High Court and that as the question is a mixed question of
fact and law, the High Court went wrong in allowing it to be
raised for the first time before it. We cannot say that
this point was not raised in the plaint. The suit was filed
for eviction, and the ground for eviction was two-fold,
viz., the rent was not paid and that the appellant had
sublet the premises. In the plaint it was not stated that
the tanancy was a monthly tenancy; on the other hand, the
respondents alleged in the plaint that the appellant was
their tanant under the lease deed dated August 8, 1952, and
they filed, along with the plaint, the said lease deed, the
terms whereof clearly show that the term of the lease was
for one year. The appellant admitted those facts. It is,
therefore, manifest that the appellant never denied that the
term of the lease was not for one year. The High
913
Court was, therefore, justified in considering the point,
because the validity of the notice depended upon the term of
the tenancy and also because the question of the term of the
tenancy depended solely on the construction of the lease
deed. On the basis of the lease deed the High Court held
that the term of the lease is only for one year and it had
expired by efflux of time. The document says that the house
had been taken on rent for one year by the first party and
ends thus, "if the rent falls into arrears then the second
party shall be jointly and severally entitled to eject me
namely the first party before the expiry of the term of
tenancy and realise the rent due." It is, therefore,
manifest that the lease was for a period of one year and
that it was not a monthly tenancy. As the term fixed under
the deed had expired, the appellant was not entitled to any
statutory notice under s. 106 of the Transfer of Property
Act, 1882.
Even so, it is contended that the appellant had not sublet
the premises within the meaning of s.13(1) (b)(i) of the
Act. It is said that the sub-section applies only to a case
of sub-tenancy created for the first time after the lease
was taken and does not cover a case where there was already
a sub-tenant and a new sub-tenant was inducted when the
previous sub-tenant vacated it. This conclusion is sought
to be drawn from the words "sublet, assigned, or otherwise
parted with the possession and it is argued if possession
had already been parted with by way of sub-lease and what
was done was only to substitute another in the place of the
earlier sub-tenant, this sub-clause is not attracted. There
are no merits in this contention. Section 13(l)(b)(i)
clearly says that if a tenant, without obtaining the consent
of the landlord in writing has, after the commencement of
this Act, sub-let, assigned or otherwise parted with the
possession of the whole or any part of the premises, he is
liable to be evicted. Here, admittedly after the lease deed
of 1952 the appellant has sublet some
914
of the rooms of the building to others without obtaining the
written consent of the landlord. The fact that there were
sub-tenants in the said portions could not conceivably be of
any help to the appellant, because the new sub-tenants were
not holding under the -earlier sub-tenants, but were
inducted by the appellant, after the earlier sub-tenancies
were terminated. The appellant, having sublet part of the
promises without the consent of the landlord in writing,
cannot invoke the protection given to him under s. 13 of the
Act.
In this view, the High Court was certainly right in setting
aside the decree of the Civil Judge, for the Civil judge
refused to past an order of eviction on a wrong legal basis
that the appellant was a monthly tenant, ignoring the
express term in the lease deed itself. As the decree was
not ""according to law", the High Court, in exercise of its
jurisdiction under s. 35 of the Act, was certainly within
its rights to set aside the said decree.
In the result, the appeal fails and is dismissed with costs.
Appeal dismissed.
915





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