Dr. A. Lakshmanaswami Mudaliar and others vs Life Insurance Corporation

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 400 of 1961

Decision Date: 11 December 1962

Coram: J.C. Shah, Bhuvneshwar P. Sinha, P.B. Gajendragadkar, K.N. Wanchoo, K.C. Das Gupta

In this matter the petitioners identified as Dr A Lakshmanaswami Mudaliar and others sought relief against the Life Insurance Corporation. The judgment was delivered on 11 December 1962 by a bench comprising Justice J C Shah, Justice Bhuvneshwar P Sinha, Justice P B Gajendragadkar, Justice K N Wanchoo and Justice K C Das Gupta. The case is reported as 1963 AIR 1185 and 1963 SCR Supplement (2) 887. The issues presented involved the authority of directors to make a donation, the characterization of the shareholders’ dividend account, the proprietary rights of shareholders, and the construction of the memorandum of association of the United India Life Assurance Company Ltd. under the Life Insurance Corporation Act, 1956 (31 of 1956).

The factual background disclosed that on 15 July 1955, at an extraordinary general meeting of the shareholders of United India Life Assurance Company Ltd., a resolution was passed which, among other matters, approved a donation of two lakh rupees out of the shareholders’ dividend account to a trust that was to be formed for the purpose of promoting technical or business knowledge, including knowledge in insurance. Subsequently, on 1 July 1956, the Life Insurance Corporation Act came into force, and by operation of its provisions all assets and liabilities belonging to the controlled business of any insurer were vested in the Life Insurance Corporation. Section 15(l)(a) of that Act empowered the Corporation to apply to the Tribunal for relief concerning payments made by insurers in the five years preceding the vesting date, where such payments were not reasonably necessary for the purpose of the controlled business. The Corporation therefore applied to the Tribunal for relief regarding the two‑lakh‑rupee donation made by United India Life Assurance Company to the petitioners, contending that the donation was ultra vires the company’s powers and was not reasonably necessary for the controlled business. The Tribunal ordered the petitioners to restore the sum of two lakh rupees to the Corporation, and the petitioners appealed that order by way of special leave.

The Court held that the shareholders’ dividend account, as provided for in the company’s articles of association, did not confer any proprietary interest upon the shareholders, even though the account was intended for the payment of dividends. The mere description of the dividend account as the exclusive property of the shareholders did not create a proprietary right in them. The right to receive dividends depends on a recommendation made by the directors; without such recommendation the shareholders acquire no entitlement to the fund or any part thereof, a principle referred to in Bacha P Guzdar v. Commissioner of Income‑Tax, Bombay, [1955] 1 SCR 876. The Court further held that the meeting at which the resolution was passed was a meeting of the company itself and could not be characterized as a meeting of the shareholders in their individual capacities. Consequently, the resolution of the company and the acceptance by the petitioners of the donation could not be said to create a contractual relationship supported by consideration.

In this appeal, the Court examined whether the sum of Rs 2 lakhs transferred from the Shareholders’ Dividend Account constituted a valid contract. The Court held that no contract existed because there was no consideration to support the transfer. The Court further observed that the object of the company, namely to invest and deal with the funds and assets of the company upon such securities or investments, could not be interpreted as authorising the making of a donation. Such a power was not expressly provided in the memorandum of association and could not be inferred from the general clause in the memorandum that permits incidental acts. The Court cited 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 H.L. 653 in support of this view. The Court also held that referring to the Articles of Association for construing the memorandum is permissible only where the memorandum is silent or ambiguous, relying on Angostura Bitters & Company Ltd. v. Kerr [1933] A.C. 550. Moreover, the Court found that making donations to the Trust, even if such donations might indirectly benefit the insurance business, was beyond the company’s lawful powers. The Court relied on Tomkinson v. South Eastern Railway (1887) 35 Ch.D. 675 for this principle. The Court further concluded that because the act of the company was ultra vires, it produced no legal effect and could not be ratified even if all shareholders agreed. Consequently, the payments made under the ultra vires action created no rights in the appellants, and under section 15 of the Life Insurance Corporation Act they were properly directed to refund the amount personally. The judgment record shows that the appeal arose from an order dated 20 December 1958 passed by the Life Insurance Tribunal, Nagpur, in case 21/XV of 1958. The appeal, numbered Civil Appeal No 400 of 1961, was taken by special leave. Counsel for the appellants appeared, and counsel for respondent No 1, including the Solicitor General of India, also appeared. The judgment was delivered by Justice Shah. The factual backdrop involved the United India Life Assurance Company Ltd., incorporated under the Companies Act 1882, whose principal object was to carry on life‑insurance business and which was registered as an insurer under the Life Insurance Act VI of 1938. At an extraordinary general meeting of its shareholders on 15 July 1955, a resolution was passed sanctioning a donation of Rs 2 lakhs from the Shareholders’ Dividend Account to the M. Ct. M. Chidambaram Chettyar Memorial Trust, intended in part to promote technical or business knowledge, including knowledge in insurance, and authorising the directors to pay the sum to the trustees when the trust was formed.

By a resolution dated 15 July 1955 the board of United India Life Assurance Company Ltd authorised the payment of two lakh rupees from the shareholders’ dividend account to a charitable entity that was to be called the M Ct M Chidambaram Chettyar Memorial Trust, the object of which was to promote technical or business knowledge, including knowledge in insurance; the resolution also directed the directors to pay the said sum to the trustees when the trust was formed. At the time the resolution was passed the persons who are now identified as appellant 2 and appellant 4 were directors of the company, and appellant 4 was the chairman of the board of directors. Subsequently, on 6 December 1955 five settlers, the company itself included among them, executed a deed declaring their intention to establish a charitable trust in memory of the late M Ct M Chidambaram Chettyar, describing his services to a wide range of institutions, organisations, industry, commerce, finance, art, science and education, and stating that they had therefore transferred and delivered to the trustees a sum of twenty‑five thousand rupees together with any interest, rents, dividends, profits or other income arising therefrom, to be held on trust for the purposes set out in the deed. The deed listed numerous objects, such as the creation and maintenance of scholarships, stipends and allowances for Indian students pursuing studies, the establishment of chairs or lectureships, the conduct of competitions to test proficiency in essay writing or speaking, the promotion of art, science, industrial, technical or business knowledge including banking, insurance, commerce and industry, the provision of subsidies or support to charities in India engaged in improving human relations in industrial or commercial affairs, and the establishment, maintenance or support of educational institutions or libraries in India for imparting general, technical or scientific knowledge, as well as the making of subscriptions, donations or financial assistance to any educational or charitable institution in India. Under the terms of the deed the persons now called appellant 2, appellant 3 and appellant 4 were nominated as trustees, and the first appellant was appointed a trustee by clause 8 of the deed. In accordance with the resolution of 15 July 1955 the directors made an initial instalment of five thousand rupees to the trustees, and the remaining balance of one lakh ninety‑five thousand rupees was paid on 15 December 1955. The Life Insurance Corporation Act, 1956 came into force on 1 July 1956, and Section 7 of that Act mandated that on the appointed day all assets and liabilities pertaining to the “controlled business” of every insurer be transferred to and vested in the Life Insurance Corporation of India; the term “controlled business” was defined to include, inter alia, any insurer specified in sub‑clause (a)(ii) of sub‑clause (b) of clause (9) of Section 2 of the Insurance Act that carried on life‑insurance business and no other class of insurance business. The appointed day was notified as 1 September 1956, and on that date the assets and liabilities of the United India Life Assurance Company, together with those of other insurers, were transferred to and vested in the Life Insurance Corporation. On 30 September 1957 the Life Insurance Corporation, hereinafter referred to as “the Corporation”, demanded that the appellants refund the amount of two lakh rupees that had been received by the trust from the company in December 1955, and the appellants, by a letter dated 10 December 1957, denied any liability to make such a refund.

In December 1955 the trust received a sum of two lakh rupees from the Company, and the appellants responded in a letter dated 10 December 1957 that they denied any liability to return that amount. Consequently, on 14 March 1958 the Corporation filed an application before the Life Insurance Tribunal, which had been constituted under the Life Insurance Corporation Act, seeking an order that the trustees be jointly and severally directed to pay the Corporation the sum of two lakh rupees together with interest calculated at the rate of six per cent per annum from the date the amount was paid to the trustees. The Corporation alleged that the resolution dated 15 July 1955, together with the payments made pursuant to that resolution, were ultra vires the Company, void, and of no legal effect; further, it contended that the Company’s Memorandum did not authorise such a payment, that the donation was not in the interests of the Company’s business, that it was not a recognised method of conducting the business, and that the donation conferred no direct or substantial advantage on the Company. In its written statement the appellants submitted that the Company’s Articles of Association expressly authorised the directors to make donations to any charitable, benevolent, public, general or useful object, and that the two‑lakh‑rupee amount had been drawn from the Shareholders’ Dividend Account, which was distinct and separate from the Company’s general assets. According to the appellants, the Articles of Association stipulated that money credited to the Shareholders’ Dividend Account constituted the exclusive property of the shareholders, not of the Company, and that the Company held such money only in trust for the shareholders, who possessed an absolute right of disposal over that account. The appellants further asserted that the shareholders, exercising their absolute ownership and disposal power, resolved to donate two lakh rupees to the trust from that account, and therefore the payment could not be questioned by the Company or by any body claiming to act on its behalf; they argued that had the Company not been taken over by the Corporation, the same payment could not have been challenged as ultra vires, and that the Corporation’s powers were not broader in scope or ambit than those of the Company. The appellants additionally contended that, in their capacity as trustees, they were not personally liable to refund the amount claimed by the Corporation. By an order dated 20 December 1958, the Tribunal directed the appellants to pay jointly and severally the sum of two lakh rupees within fifteen days of service of the order, and, in the event of default, to pay interest at the rate of six per cent per annum until the amount was realised. Against that order this appeal, with special leave, has been filed. The Corporation’s right to demand payment of the amount, even if the resolution authorising the payment was unauthorised, cannot be challenged because of the express provision in the relevant provision of the Life Insurance Corporation Act.

Section 15 of the Life Insurance Corporation Act was examined. Under subsection 15(1)(a) of the 1956 Act, when an insurer whose controlled business had been transferred to and vested in the Corporation made any payment to any person without consideration within five years before 19 January 1956, the Court considered two situations. First, the payment might not have been reasonably necessary for the purpose of the insurer’s controlled business. Second, the payment might have been made with an unreasonable lack of prudence on the part of the insurer. In either situation, the Court held that the Corporation could apply to the Tribunal for relief concerning the transaction. Clause (2) of the same section authorized the Tribunal to issue any order it deemed just against any party to the application, taking into account the degree of responsibility or benefit each party derived from the transaction and all surrounding circumstances.

The Court stated that the initial task was to determine the actual effect of the resolution dated 15 July 1955 and to understand the nature of the Shareholders’ Dividend Account. The relevant provisions of the Company's Articles of Association were identified as Articles 116 and 117. Article 116 provided that interest on the paid‑up capital, calculated at a simple rate of six per cent per annum for each year covered by the Valuation Period, would be taken as a first charge, deducted from the remaining surplus, and that the deducted amount would become the exclusive property of the shareholders and be transferred to the Shareholders’ Dividend Account. Article 117 stipulated that from the remaining surplus the shareholders were entitled to one‑tenth share, that the amount representing this one‑tenth share would also become the exclusive property of the shareholders, and that it likewise would be carried over to the Shareholders’ Dividend Account.

Further, the Court examined Article 119, which governed the payment of dividends and bonuses out of the Shareholders’ Dividend Account. That article declared that any dividend or bonus had to be declared and paid to the shareholders in proportion to the paid‑up capital, drawing only from the total amount remaining in the Shareholders’ Dividend Account and in accordance with the Articles. Article 123 limited the declaration of dividends to amounts not exceeding those recommended by the directors, although the Company in a general meeting could declare a smaller dividend. Article 124 clarified that no dividend could be paid to shareholders except out of the Company’s surplus, and that such dividend could be paid only from the amount held in the Shareholders’ Dividend Account.

Finally, the Court noted that the resolution passed by the Company on 15 July 1955 resolved to donate Rs 2 lakhs to the Trust. The Court acknowledged that the donated amount was unquestionably payable out of the Shareholders’ Dividend Account. However, the Court emphasized that the impugned resolution did not constitute a declaration of dividend; rather, it was a donation to the Trust, and consequently no dividend was declared on behalf of the shareholders in respect of that payment.

In this case the Court observed that any resolution of the Company that directed a payment from the Shareholders’ Dividend Account did not, by itself, constitute a resolution declaring a dividend. The Court explained that the directors were required to first recommend the payment of a dividend at a specific rate, and only thereafter could a separate resolution be passed that either adopted the directors’ recommendation or authorised a dividend at a lower rate. The Court noted that, at the same meeting, the directors had recommended the payment of an interim dividend that was free of income tax and that was to be paid at the rate of fifty rupees per share on the paid‑up capital of the Company. The directors further resolved that this dividend should be paid out of the Shareholders’ Dividend Account to all persons who were registered as holders of shares at the relevant date. Accordingly, the Court held that the resolution that was being challenged was not a dividend declaration but rather a donation of a sum of money to a trust, and that it did not create a liability to pay a dividend on behalf of the shareholders to the trust. The Court then turned to the statutory background for the separate Shareholders’ Dividend Account in life‑insurance companies. It pointed out that Section 49 of the Insurance Act 1938 prohibited insurers of certain classes – the Company fell within that class – from using any part of the life‑insurance fund, or of any other class or subclass of insurance business, either directly or indirectly, for the purpose of declaring or paying a dividend to shareholders, paying a bonus to policy‑holders, or making any payment in respect of debentures, except where the payment represented a surplus shown in the valuation balance‑sheet in Form I as required by the Fourth Schedule and submitted to the Controller under Section 15 as a result of an actuarial valuation of the insurer’s assets and liabilities. Further, the Court cited subsection (1) of Section 10, which required every insurer carrying on life‑insurance business to maintain a separate fund of receipts pertaining to that business, a fund that had to be distinct from all other assets of the insurer, and stipulated that deposits made by the insurer in connection with life‑insurance business were to be deemed part of the assets of that separate fund. Subsection (3) of the same section, the Court said, made the life‑insurance fund the absolute security of the life‑insurance policyholders and barred its use, directly or indirectly, for any purpose other than the conduct of the life‑insurance business. Under Section 13, the Court noted, each such insurer was obligated to cause an actuarial investigation of all life‑insurance business transacted by it at least once every three years, to include a valuation of that business, and to prepare an abstract of the actuary’s report in accordance with the regulations set out in Part I of the Fourth Schedule and to satisfy the requirements of Part II of that Schedule. Finally, the Court referred to Part I of the Fourth Schedule, which laid down various regulations for preparing abstracts of actuaries’ reports, and to Part II, which prescribed the specific requirements that must be met by an abstract that related to life‑insurance business.

In this case, the Court explained that the Articles of Association contain specific provisions governing the creation of a reserve account for the payment of dividends. Articles 116 and 117 direct that, from the surplus shown on the valuation balance‑sheet, two amounts must be set aside: first, interest on the paid‑up capital at a rate of six per cent per annum for each year covered by the valuation period, and second, ten per cent of the remaining surplus. Both of these amounts are to be transferred to the Shareholders’ Dividend Account. The Court noted that the scheme embodied in these two Articles requires that the surplus be allocated initially to the shareholders in the percentages prescribed and thereafter to the policy‑holders. Article 124 further provides that any dividend is payable only out of the surplus that is included in the Shareholders’ Dividend Account.

The Court observed that, although Articles 116 and 117 declare the amounts set aside as the executive property of the shareholders, this declaration does not confer an individual proprietary interest in the Shareholders’ Dividend Account upon any shareholder. Until a dividend is formally declared, the shareholders have no right to participate in that fund. The Court explained that the expression “exclusive property of the shareholders” merely emphasizes that the policy‑holders have no interest in the Shareholders’ Dividend Account; the fund is divisible solely among the shareholders, and policy‑holders are excluded from any participation. Moreover, even when a 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.

In support of this analysis, the Court cited the earlier decision in Bacha F. Guzdar v. Commissioner of Income‑Tax, Bombay, holding that a shareholder, by purchasing shares, acquires the right to partake in the company’s profits only when the company declares a dividend in accordance with its Articles, and that the shareholder’s right to share in the assets is limited to the surplus remaining after winding up, not to the assets as a whole. Consequently, the Court concluded that the fund belongs to the company and remains the company’s property until a resolution of the company, based on a recommendation of the directors, determines its destination by declaring a dividend.

The Court further clarified that the Articles of Association expressly empower the company, in a general meeting, to declare a dividend under Articles 122 and 123, but that the amount of any dividend cannot exceed what the directors recommend. Thus, the right to receive a dividend depends on a directors’ recommendation and a subsequent resolution of the general meeting. Absent such a recommendation and resolution, the shareholders acquire no entitlement to any portion of the fund from which a dividend would be payable. The Court then turned to the argument presented by counsel for the appellants that the meeting held on July 15 1955 was a meeting of the shareholders, and indicated that this contention would be considered in the subsequent analysis.

The Court observed that the shareholders’ resolution to donate an amount of Rs 2 lakhs from the Shareholders’ Dividend Account could not be treated as a resolution determining the disposition of a portion of the Fund to which the shareholders were entitled, and therefore that resolution had no legal effect. The meeting at which the resolution was passed was a meeting of the Company that had been specifically called to consider a number of resolutions, one of which concerned the donation of Rs 2 lakhs out of the Shareholders’ Dividend Account. Although the Articles of Association make clear that dividends are payable out of that account, the Court noted that until a resolution is passed by the Company in a general meeting, no part of the account can be said to belong to the shareholders as dividend. The parties agreed that no resolution had been passed declaring the amount of Rs 2 lakhs to be a dividend payable to the shareholders. Consequently, the argument advanced by counsel for the appellants that the Company’s resolution and its acceptance by the appellants in their capacity as trustees of the Trust created a contract was rejected as untenable. The Court held that, within the meaning of the Indian Contract Act, there was no consideration moving from the trustees for accepting the amount, even if the resolution were treated as an offer. Section 2(d) of the Indian Contract Act defines consideration as an act or forbearance or promise made at the desire of the promisee or any other person. The Court said that a mere willingness to use the monies for the purpose of the Trust could not constitute consideration, because consideration must be of value. Even before the Trust was formed, the Directors had desired to make a donation in favour of the intended Trust and had passed a resolution sanctioning that donation. When the trust deed was executed, the Directors paid the amount in accordance with the resolution. The Court held that the trust’s mere acceptance of the amount did not constitute consideration moving from the trust to the Company. Accordingly, the Company’s payment of the amount resolved to be donated was purely gratuitous; the acceptance turned the transfer into a gift and did not give rise to a contract.

The Court further explained that a Company is authorized to pursue only those objects that are set out in its Memorandum of Association and cannot act beyond them. The objects of the Company are enumerated in Clause III of the Memorandum. Under the first sub‑clause, the Company is empowered to carry on life‑insurance business in all its branches, as well as all kinds of indemnity and guarantee business, and for that purpose to enter into and give effect to all contracts and arrangements. Sub‑clause (ii) authorizes 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.” The Court noted that the remaining sub‑clauses concerning ancillary powers were not material for the present appeal. Thus, the Court reaffirmed that the Company must act within the scope of the objects defined in its Memorandum and that any action beyond those objects would be ultra vires.

Clause (v) of the Memorandum of Association 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 Memorandum, like any other legal document, must be interpreted according to the general principles that guide the construction of legal instruments. No rigid rule of construction applies uniquely to the Memorandum. It must be read fairly, and its meaning must be derived from a reasonable interpretation of the words it contains. This approach was endorsed in Egyptian Salt and Soda Company v. Port Said Salt Association. Similarly, Ashbury Railway Carriages and Iron Company v. Riche held that the covenant in a memorandum is not merely a promise that every member will observe the conditions on which the company is founded, but also a commitment that those conditions will not be altered. When the memorandum contains a covenant that its objects shall not be changed, that covenant is understood to include an agreement that the company shall not pursue, in practice, any object that is not expressly mentioned in the memorandum.

The Court explained that this type of incorporation clause has both affirmative and negative aspects. It positively defines the scope of power and vitality that law grants to the corporation, and it negatively restricts the corporation from acting beyond that defined scope. In other words, the memorandum affirms the powers that the Company may exercise, while simultaneously prohibiting the use of the corporate existence for any purpose not specified therein. Consequently, the power to carry out a stated object necessarily includes the power to undertake activities that are incidental or naturally conducive to achieving that object, because such activities are connected with, and facilitate, the attainment of the object.

Specifically, sub‑clause (i) of clause III of the objects clause provides that the Company may carry on the life‑insurance business in all its branches. Sub‑clause (ii) authorises the Company to invest and deal with its funds and assets in securities or investments, and to do so in a manner that may be prescribed from time to time by the Articles of Association. The Court clarified that sub‑clause (ii) is not itself an object clause; rather, it is a clause that merely authorises investment of the Company’s funds. Accordingly, sub‑clause (ii) does not confer on the Directors a general power to manage the funds in any manner that the Articles may later prescribe. The power to invest is limited to the authority expressly granted by the Memorandum, and any further direction must be consistent with that original grant.

In this case, the Court explained that the power granted to the Company under its Memorandum of Association includes the authority to invest and deal with its funds and assets. The Directors, acting under sub‑clause (ii) of clause III, are therefore authorised only to invest and manage those funds and assets in such securities or investments as prescribed by the Articles of Association, and they must exercise that power in the manner laid down by the Articles. Article 93(t) of the Companies Act invests the Directors with the authority to establish, maintain and subscribe to any institution or society that may benefit the Company, and also permits them to make payments toward any charitable, benevolent, or general public object. However, the Court held that such authority is limited to actions that the Company itself is empowered to pursue under its Memorandum of Association, either because the object is expressly stated or because it is incidental or naturally conducive to a stated object. If a proposed object lies outside the competence of the Company, the Directors cannot rely on Article 93(t) to expend Company funds for that purpose. The primary object of the Company, as set out in the Memorandum, is to carry on the life‑insurance business in all its branches. Accordingly, a donation of Company funds to a charitable trust does not fall within an activity that is incidental to or naturally conducive to that primary object, and there is no discernible connection between such a donation and the Company’s insurance business. The Court further observed that the Memorandum of Association must be read together with the Articles of Association wherever the terms are ambiguous or silent. Citing the Privy Council decision in Angostura Bitters & Company Ltd. v. Kerr, the Court noted that, except where a matter must be provided for by statute in the Memorandum, the Memorandum is not the dominant document but must be interpreted in conjunction with the Articles to resolve any ambiguity or to supplement matters on which it is silent. In the present case, however, the Court found no ambiguity in the relevant provisions of the Memorandum. Clause III deals plainly with the objects and powers of the Company, and while the Articles may explain those provisions, they cannot enlarge the scope of the Memorandum. Sub‑clause (v) of clause III merely authorises the Company to do other things that are incidental or conducive to achieving the above objects, a provision that reflects the usual implicit interpretation of every Memorandum and does not create an independent object or confer additional powers.

The Court explained that a clause of this type does not create any separate object for the company and does not give the company any extra power. An act is regarded as incidental to or naturally conducive to the main object only when it bears a reasonably close connection to that object. If the act provides only an indirect or remote benefit that the company might obtain by doing something outside the object clause, such an act cannot be allowed as an extension of the company’s powers. The Court then referred to the decision in Tomkinson v. South Eastern Railway (1), where it was held that a resolution passed by the shareholders of a railway company authorising the directors to spend £1,000 of the company’s funds as a donation to the Imperial Institute was ultra vires, even though the Institute’s establishment might increase passenger traffic on the railway’s line. In delivering the judgment, Kay, J. 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 this railway company than the present exhibition of pictures at Burlington House, the Grosvenor Gallery, Madame Tussaud’s, or any other institution in London that can be mentioned. The only ground for suggesting that the company has the right to apply its funds, which it has been permitted to raise for specific purposes, to this purpose is the argument that the Imperial Institute, if it succeeds, will very probably greatly increase the traffic of the 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 have never heard of such a rule, and, as far as I understand the law, that clearly would not be a proper application of the money 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 why this railway company thinks it right to spend part of its funds in subscribing to it is 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 Court noted that the trust in the present case has many objects, one of which is undoubtedly to promote art, science, industrial, technical or business knowledge, including knowledge in banking, insurance, commerce and industry.

There was no duty imposed upon the trustees to apply the trust fund, or any portion of it, toward the promotion of education in the field of insurance. Even assuming that the trustees chose to spend part of the fund for that purpose, the Court considered that it was doubtful whether individuals who received training in insurance business and practice would actually seek employment with the Company. Consequently, any advantage that the Company might obtain from having a pool of personnel trained in insurance would be so remote and indirect that it could not be described as an incidental or naturally conducive result of the Company’s objects. On this basis the Court held that the resolution which authorized the donation of Company funds was not compatible with the objects enumerated in the Memorandum of Association and therefore amounted to an act beyond the Company’s powers, i.e., ultra vires. The Court reiterated the principle that any act performed by a Company that is ultra vires produces no legal relationship or effect. Such an act is void ab initio and cannot be ratified, even with the unanimous agreement of all shareholders. The Court cited the authority of Re. Birkback Permanent Benefit Building Society (1) in support of this proposition. As a result, the payment made under the challenged resolution was unauthorised, and the trustees acquired no legal title to the sums advanced by the Directors to the trust.

The remaining issue for determination was whether the appellants could be held personally liable to return the amount that had been paid to them. The Court noted that appellants numbered two and four were, at the material time, Directors of the Company and had participated in the meeting chaired by the fourth appellant during which the ultra vires resolution was passed. Acting as officers of the Company who were responsible for authorising an act beyond the Company’s capacity, the appellants were therefore personally liable to restore the amount that had been improperly disbursed. Moreover, under section 15 of the Life Insurance Corporation Act, 1956, the Life Insurance Corporation is empowered to demand the return of any sum paid to any person without consideration and which is not reasonably necessary for the insurer’s controlled business. Section 15(2) further empowers the Tribunal to make an order for restitution against any party to the application, as it deems just, after considering the degree of responsibility each party bore for the transaction and any benefits they derived. The Court observed that the trustees, as representatives of the trust, had benefited from the payment, and that the sum remained undisposed when the Corporation sought its return. Accordingly, the Court concluded that the Tribunal could direct the trustees personally to repay the amount they had received without lawful entitlement. For these reasons the Court dismissed the appeal, holding that the appeal fails.

The court concluded that the appeal was dismissed and ordered that costs be awarded to the prevailing party. The appeal was therefore rejected. In the matter of Pooran Chand v. Motilal & Others, the bench comprising Justices S. J. Imam, L. Kapur, K. Subba Rao and J. R. Mudholkar considered issues relating to rent control, the powers of the High Court under the Delhi and Ajmer Rent Control Act of 1952, and the question of illegal sub‑letting. The landlords had granted a lease of a residential premises to the tenant for a term of one year. After the lease term had elapsed, the landlords served a notice to quit to the tenant and instituted suit for eviction, alleging that the tenant had sub‑let the premises without obtaining their written consent. The tenant contested the suit on two grounds: first, that the notice to quit was unlawful; and second, that there was no prohibited sub‑letting within the meaning of section 13(1)(b) of the Act, because the tenant had merely replaced an existing sub‑tenant with a new one. The trial court ruled in favour of the landlords, granting the decree for eviction. On appeal, the Civil Judge reversed that decision, holding that the notice to quit was invalid. The landlords then appealed to the High Court, which allowed the appeal and held that after the lease terminated by the mere passage of time, the tenant became a statutory tenant and no notice to quit was required.

The tenant argued that the High Court lacked jurisdiction to hear a second appeal and that it could not interfere with the Civil Judge’s decree under its revisional powers under section 35 of the Act, maintaining also that no illegal sub‑letting had occurred. The High Court, however, held that even if a second appeal was not permissible, the Court was authorized to set aside the Civil Judge’s decree in exercise of its revisional jurisdiction provided by section 35. It observed that the revisional power under section 35 was broader than the analogous power under section 115 of the Code of Civil Procedure, although it could not be equated with an appellate jurisdiction. The Court stated that the precise scope of section 35 could not be rigidly defined and should be evaluated on a case‑by‑case basis to determine whether the impugned judgment conformed to law. In the present case, because the tenancy had ended by the natural expiry of the term, a notice to quit under section 106 of the Transfer of Property Act was unnecessary, yet the Civil Judge had mistakenly required such a notice as a condition for granting eviction. Consequently, the decree was not “according to law,” and the High Court was justified in overturning it. The Court referred to precedents such as 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. Finally, the Court held that the tenant’s act of introducing a new sub‑tenant fell within the meaning of section 13(1)(b)(i) of the Act, which provides for eviction when a tenant sub‑lets, assigns, or otherwise parts with possession of any part of the premises without the landlord’s written consent, and that the provision is not limited to the first sub‑letting but also covers subsequent replacements of sub‑tenants.

In this appeal, the Court considered the judgment and decree of the Rajasthan High Court at Jodhpur, which had set aside the findings of the Senior Civil Judge of Ajmer and reinstated the decree of the Subordinate Judge, First Class, Ajmer. The decree had ordered the eviction of the appellant from the premises that were the subject of a suit filed by the respondents. The building in question, located at number 41 Purani Mandi, Ajmer, comprised a large number of rooms and was owned by the respondents. The appellant’s father had originally taken a lease of the building on 13 October 1935 for a period of one year at a rent of Rs 50 per month. Subsequently, on 10 July 1950, the respondents granted a lease of the same building to the appellant for one year at a rent of Rs 65 per month, and on 8 August 1952 a fresh lease was executed in the appellant’s favour at an increased rent of Rs 70 per month, with the tenancy scheduled to commence on 1 August 1952. On 27 June 1954 the respondents, through their counsel, served a notice on the appellant requiring him to vacate the premises by midnight of 31 July 1954/1 August 1954. The notice alleged that the appellant was in arrears of rent and that he had sub‑let the property. In his reply, the appellant promised to pay the arrears promptly but asserted that he had, from the beginning, sub‑let portions of the premises to others while retaining a portion for his own occupation. Because the appellant failed to comply with the notice, the respondents instituted Civil Suit No. 762 of 1954 before the Subordinate Judge, First Class, Ajmer on 2 August 1954, seeking eviction, recovery of rent arrears and other reliefs. The plaint was later amended. The appellant contested the suit on several grounds, principally challenging its maintainability. Notably, the appellant’s written statement did not deny that sub‑letting of the premises to tenants had taken place.

The Subordinate Judge decreed in favour of the respondents, finding that the notice issued to the appellant was valid and that the appellant was liable to be evicted under section 13(1)(b) of the Delhi and Ajmer Rent Control Act, 1952, on the ground that he had sub‑let portions of the premises without obtaining the landlord’s written consent. On appeal, the Senior Civil Judge of Ajmer reversed the decree, holding that the notice was short by twenty‑four hours and that the appellant had no right to sub‑let the premises without written consent, even though sub‑tenants were already occupying the premises when the appellant took the lease. The High Court, on further appeal, restored the decree of the trial court. The High Court held that the notice complied with the provisions of section 106 of the Transfer of Property Act, 1882, and further observed that, since the tenancy had expired by mere efflux of time, no notice was required. Thus, the present appeal raised four principal points, the first of which concerned the existence of a second appeal to the High Court.

The subordinate judge had held that the notice issued to the appellant was valid and that, under section 13(1)(b) of the Delhi and Ajmer Rent Control Act, 1952 (XXXVIII of 1952), the appellant was liable to be evicted because he had sublet portions of the premises without obtaining the landlord’s written consent. On appeal, the Senior Civil Judge of Ajmer reversed that decision, observing that the notice was short by twenty‑four hours and that the appellant had no right to sublet the premises without the landlord’s written permission, even though sub‑tenants were occupying the premises at the time the appellant took the lease. The matter proceeded to a second appeal before the High Court, which restored the decree of the trial court. The High Court reasoned that the notice complied with the requirements of section 106 of the Transfer of Property Act, 1882, and further held that, because the tenancy had terminated merely by the lapse of time, no notice was required at all. In the present appeal, the petitioner raised four distinct points: first, that no second appeal lay to the High Court against the decree and judgment of the Civil Judge; second, that if no second appeal was permissible, the High Court’s power to interfere with that judgment was limited to the provisions of section 35(1) of the Rent Control Act, which did not confer jurisdiction to set aside the judgment on its merits, whether legal or factual; third, that the High Court had erred in holding that the notice complied with section 106 of the Transfer of Property Act, 1882; and fourth, that the High Court had fashioned an entirely new case by concluding that the tenancy had ended by the mere efflux of time.

The court considered that expressing an opinion on the first point was unnecessary because, even assuming that no second appeal lay to the High Court against the judgment and decree of the Civil Judge, the High Court possessed ample jurisdiction to intervene under section 35(1) of the Act. That provision states: “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.” Counsel for the petitioner relied upon the decision of this Court in Hari Shankar v. Rao Girdhari Lal Chowdhury (1) to argue that the High Court’s jurisdiction under section 35 of the Act was very limited and did not justify interference in the present circumstances. The principal issue in that precedent concerned whether the landlord had consented to the sub‑letting of parts of the demised premises, and if so, the timing and effect of such consent. The trial judge in that case had found no evidence that the landlord had ever been consulted, a finding affirmed by the District Judge on appeal. The High Court, on revision, revisited the evidence and reached a contrary conclusion, prompting this Court to examine the scope of section 35 of the Act. In doing so, the Court noted that “according to law” refers to the decision as a whole rather than to isolated errors of law or fact, thereby granting the High Court broader powers than merely correcting a mistake of law under section 115 of the Code of Civil Procedure.

The trial judge found that the landlord was never consulted. On appeal, the District Judge affirmed that finding. In revision, the High Court re‑examined the evidence and reached a contrary conclusion. In that context, this Court examined the scope of section 35 of the Act. Justice Hidayatullah, speaking for the majority, observed that the phrase “according to law” refers to the decision taken as a whole and should not be equated with simple errors of law or fact. He explained that the decision must be “according to law” and would not satisfy that requirement if a miscarriage of justice occurred because of a mistake of law. He further said that the provision therefore confers powers broader than the limited power to correct errors of diction available under section 115 of the Code of Civil Procedure. The judge then reproduced at length the observations of Chief Justice Beaumont, then of the Bombay High Court, in Bell & Co. Ltd. v. Waman Hemraj (1938) 40 Bom. L.R. 125, and expressed full concurrence with those observations. Chief Justice Beaumont gave several illustrations, stressed that they were not exhaustive, and concluded that “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.” From the remarks of Justice Hidayatullah and those of Chief Justice Beaumont, it is evident that the power conferred on the High Court by section 35 of the Act is wider than the power under section 115 of the Code of Civil Procedure, although it is not identical to appellate jurisdiction. It is neither possible nor advisable to define with precision the exact scope and ambit of section 35; rather, each case must be left to the High Court to decide whether the impugned judgment is “according to law,” as explained by this Court in the earlier decision. Keeping this view in mind, we now consider whether the High Court acted within its jurisdiction. The principal question hinges on the construction of section 13(l) of the Act. The relevant portion of that section provides: “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 …”

The provision under consideration stated that a tenant, after the commencement of this Act, must not, without obtaining the landlord’s written consent, sub‑let, assign or otherwise part with the possession of the whole or any part of the premises. The appellant’s counsel argued that the provisions of this subsection were intended as an additional protection for tenants and did not require the landlord to issue a statutory notice before instituting an eviction suit. Moreover, the counsel submitted that the notice served in the present case did not satisfy the requirements of section 106 of the Transfer of Property Act, 1882. The Court did not feel it necessary to pass judgment on the validity of that particular contention because it was satisfied that the tenancy had terminated by the mere lapse of time, and consequently, the question of a statutory notice did not arise. The counsel further asserted that this point had not been raised in the plaint or before the lower courts and was being raised for the first time before the High Court, which, according to the counsel, was a mixed question of fact and law and therefore should not have been permitted. The Court could not accept the proposition that the point was never raised in the plaint. The suit was a suit for eviction and the grounds pleaded were two‑fold: non‑payment of rent and the alleged sub‑letting of the premises by the appellant. The plaint did not describe the tenancy as a monthly tenancy; on the contrary, the respondents alleged that the appellant was their tenant under a lease deed dated 8 August 1952, and they attached a copy of that lease deed to the plaint. The lease deed expressly stipulated that the term of the lease was for one year, a fact which the appellant admitted. Consequently, it was clear that the appellant never denied that the lease was not for a month but for a year. The High Court was therefore justified in examining the issue because the validity of any statutory notice would depend upon the duration of the tenancy, and the determination of that duration depended solely on the construction of the lease deed.

Relying upon the lease deed, the High Court concluded that the lease term was limited to one year and that it had expired by the natural passage of time. The document itself recorded that the house had been taken on rent for a period of one year by the first party and contained a clause stating that if the rent fell into arrears, the second party would be jointly and severally entitled to eject the first party before the expiry of the tenancy and recover the rent due. This language made it manifest that the lease was for a fixed period of one year and not a month‑to‑month arrangement. Because the fixed term had come to an end, the appellant was not entitled to any protection that might have been available under section 106 of the Transfer of Property Act, 1882. The Court therefore found no merit in the appellant’s claim that a statutory notice was required, and it also rejected the contention that sub‑letting had not occurred within the meaning of subsection (b)(i) of section 13, as the lease deed clearly established the tenancy’s duration and the appellant’s admission confirmed the factual backdrop.

In the matter before the Court, it was established that the tenancy created under the lease deed was not a monthly tenancy. Because the fixed term stipulated in the deed had come to an end, the appellant could not rely on any statutory notice provided by section 106 of the Transfer of Property Act, 1882. Nevertheless, the appellant argued that he had not sub‑let the premises in a manner covered by section 13(1)(b)(i) of the same Act. The appellant’s contention was that the sub‑section applied only to a fresh sub‑tenancy that arose after the original lease was executed and that it did not extend to a situation where a pre‑existing sub‑tenant vacated and a new sub‑tenant was introduced to occupy the same portion. This argument was derived from an interpretation of the words “sublet, assigned, or otherwise part with possession”, and the appellant claimed that, since possession had already been transferred through a prior sub‑lease, the subsequent substitution of another tenant for the former sub‑tenant did not activate the sub‑clause. The Court found that this contention had no merit. Section 13(1)(b)(i) expressly provides that a tenant who, without obtaining the landlord’s written consent, sub‑lets, assigns, or otherwise parts with possession of the whole or any part of the premises after the commencement of the Act, becomes liable to be evicted. In the present case, it was admitted that after the execution of the lease deed of 1952, the appellant had indeed sub‑let several rooms of the building to other persons without securing the landlord’s written permission. The existence of earlier sub‑tenants in those portions could not aid the appellant, because the new occupants were not holding under the former sub‑tenants; they were brought in by the appellant after the earlier sub‑tenancies had been terminated. Accordingly, having sub‑let part of the premises without the requisite written consent, the appellant could not invoke the protection afforded by section 13 of the Act. The Court therefore concluded that the High Court was correctly justified in setting aside the decree of the Civil Judge. The Civil Judge had erred by refusing to pass an eviction order on the incorrect legal premise that the appellant was a monthly tenant, thereby disregarding the explicit term in the lease deed. Since the decree was not issued “according to law”, the High Court, exercising its jurisdiction under section 35 of the Act, was within its authority to annul that decree. Consequently, the appeal failed, and the Court dismissed it with costs, confirming the dismissal of the appeal.