Corporate Law Case Brief – Lakshmanaswami Mudaliar v. L.I.C.

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Facts:

  • 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.
  • 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.
  • Then a special leave application was filed to the Supreme Court in appeal of the matter decided in the tribunal.

 Issues:

  • Whether the plaintiff consented to the subletting of parts of the demised premises and if so, when and to what effect ?

Holding:

  • An act of the company is ultra vires, if it is not:
    • Essential for the fulfilment of the objects stated in the Memorandum
    • Incidental or consequential to the attainment of its objects
    • Which the company is authorized to do by the company Act, in course of its business.
    • 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 shareholders agree.
    • The bearers of the company who were responsible for passing the resolution ultra vires the company are personally liable to make good, the amount belonging to the company which was unlawfully disbursed in pursuance of the resolution.
    • Section 13 of the Company Act (1956), required to specify the main object of the company and object ancillary to the attainment of the main object.
    • It was held that the Memorandum of Association of a company must be read fairly and its import derived from a reasonable interpretation of the language which its employs. Where a particular act has not been provided for in the Memorandum of Association, the directors cannot seek recourse to the Articles of Association to imply that such business falls within its objects.
    • The Memorandum of Association has to be read with the Articles of Association, where the terms are ambiguous or silent. This process may explain the provisions of the Memorandum itself but cannot extend to the scope.

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