TMI Blog1962 (12) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... ust 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. Appeal dismissed. - 400 OF 1961 - - - Dated:- 11-12-1962 - B.P. SINHA, P.B. GAJENDRAGADKAR, K.N. WANCHOO, K.C. DAS GUPTA AND J.C. SHAH, JJ. Purshottam Trikumdas, J.B. Dadachanji, O.C. Mathur and Ravinder Narain for the Appellant . C.K. Daphtary, G.S. Pathak, B.R.L. Iyengar, J.P. Shroff and K.L. Hathi, for the Respondent. JUDGMENT 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 shareholders of the company, the following resolution, amongst others, was passed : "Resolved that a dona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 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-clause ( a )( ii ) and sub-clause ( b ) of clause (9) of section 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, hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the date of service 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. 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 section 15 of the Life Insurance Corporation Act. Under section 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 clause (2) the Tribunal is authorised to make such order against any of the parties to the application as it thinks just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 49 of the Insurance Act, 1938, which prohibited insurers of certain classes (and the company is an insurer of that class) carrying on the business of life insurance, from utilising 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 policy-holders or of making any payment in service of any debentures, except a surplus shown in the valuation balance-sheet in For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end is declared, the shareholders have no right to participate in the fund. The expression "exclusive property of the shareholders" only emphasizes that in the Shareholders' Dividend Account the policyholders having no right to interest: it means that the fund is divisible only among shareholders, policy-holders having no right to participate therein. However, until 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 holdings. As observed by this court in Bacha F. Guzdar v. Commissioner of Income-tax [1955] 1 SCR 876 ; 27 ITR 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 share holders. He has undoubtedly a further right to participate in the assets 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 continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 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 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 denoted 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 clause III. By the first sub-clause 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause 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-clause ( ii ) of clause 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conducive to 1he 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 Co. [1887] 35 Ch. D. 657 it was held that a resolution passed by the shareholders of a railway company authorising the directors to subscribe 1,000 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 1,000 to the Imperial Institute'. I pause there. The Imperial Institute has no more connection with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objects mentioned in the memorandum of association and en 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. In re Birkbeck Permanent Benefit Building Society [1912] 2 Ch. D. 183 . 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 Nos. 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 section 15 of the Life Insurance Corporation Act, 1956, the Life ..... X X X X Extracts X X X X X X X X Extracts X X X X
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