Company Resolution to Donate to Charity Deemed Ultra Vires, Directors Liable for Refund

Dr. A. Lakshmanaswami Mudaliar Versus Life Insurance Corporation of India

Dr. A. Lakshmanaswami Mudaliar Versus Life Insurance Corporation of India - [1963] 33 COMP. CAS. 420 (SC), 1963 AIR 1185, 1963 (2) Suppl. SCR 887 Issues Involved:
1. Validity of the resolution passed by the company to donate Rs. 2 lakhs to a charitable trust.
2. Authority of the directors under the articles of association to make such a donation.
3. Ownership and nature of the Shareholders' Dividend Account.
4. Whether the donation was ultra vires (beyond the powers) of the company.
5. Personal liability of the trustees to refund the amount.

Detailed Analysis:

1. Validity of the Resolution to Donate Rs. 2 Lakhs:
The resolution passed on July 15, 1955, by the United India Life Assurance Company Ltd. to donate Rs. 2 lakhs to the M.Ct. M. Chidambaram Chettyar Memorial Trust was challenged. The Corporation alleged that the resolution and the subsequent payments were ultra vires the company and void, as the memorandum of the company did not authorize such payment. The resolution was not in the interests of the company's business and did not provide any direct or substantial advantage to the company.

2. Authority of Directors Under Articles of Association:
The appellants argued that the directors were authorized by the articles of association to make donations for charitable or benevolent objects. Specifically, Article 93(t) allowed the directors to make payments towards any charitable or benevolent object. However, this was only permissible if the company had the power under the memorandum of association to achieve the specified object or if it was incidental or conducive to the company's objects. The Tribunal found that the primary object of the company was to carry on life insurance business, and donations to a charitable trust were not incidental or naturally conducive to that object.

3. Ownership and Nature of the Shareholders' Dividend Account:
The Shareholders' Dividend Account was constituted under Articles 116 and 117 of the company's articles of association. The account was to hold the surplus allocated to shareholders, but until a dividend was declared, the shareholders had no right to participate in the fund. The fund belonged to the company until a resolution declaring a dividend was passed. The resolution to donate Rs. 2 lakhs did not declare a dividend; hence, the amount remained part of the company's assets.

4. Ultra Vires Nature of the Donation:
The court held that the donation was ultra vires the company as it was not within the objects mentioned in the memorandum of association. The memorandum authorized the company to carry on life insurance business and to invest and deal with funds, but not to make charitable donations. The donation had no reasonably proximate connection with the company's objects and was not incidental or conducive to the attainment of those objects. The court referenced Tomkinson v. South Eastern Railway Co., where a similar donation was deemed ultra vires, emphasizing that indirect benefits to the company did not justify the expenditure.

5. Personal Liability of Trustees:
The Tribunal directed the appellants to refund the amount, holding them personally liable. Appellants Nos. 2 and 4, being directors at the time, were responsible for passing the ultra vires resolution and were thus liable to make good the amount unlawfully disbursed. Section 15 of the Life Insurance Corporation Act, 1956, empowered the Corporation to demand repayment of amounts paid without consideration and not necessary for the controlled business of the insurer. The trustees, having benefited from the payment, were ordered to refund the amount received.

Conclusion:
The appeal was dismissed, and the appellants were ordered to pay the sum of Rs. 2 lakhs with interest. The resolution to donate the amount was found to be ultra vires the company, and the trustees were held personally liable to refund the amount to the Corporation.