A. Lakshmanaswami Mudaliar v Life Insurance Corporation of India

Facts

Shareholders of an insurance company, whose business had been taken over by the Life Insurance Corporation on nationalisation, passed a resolution to donate Rs. 2 lakh to a trust formed to promote technical and business knowledge. The directors paid Rs. 2 lakh to the trust. The LIC challenged the payment as ultra vires the company.

Issues

• Was a donation to a charitable/educational trust within the company's objects, given its insurance-related objects clause?
• Could shareholders authorise, by resolution, an application of funds outside the company's objects?

Arguments

The trustees/donees argued the donation fell within an object permitting acts conducive to the company's business and was sanctioned by the shareholders. The LIC argued the objects clause must be read as confined to the company's insurance business, so a gratuitous donation was outside its powers and void.

Held

The Supreme Court held the payment ultra vires and recoverable. An object clause must be construed in the context of the company's main business; a power 'to do all such things as are conducive to the attainment of objects' is ancillary and cannot justify an application of funds unconnected with the business. As the company's business had been nationalised, the donation could not be conducive to any business it carried on. A resolution of shareholders could not validate an ultra vires application of the company's funds.

Ratio decidendi

Subsidiary or ancillary powers in the memorandum must be exercised in furtherance of the company's main objects; expenditure outside those objects is ultra vires and void notwithstanding shareholder approval.

Significance

The leading Indian Supreme Court authority on the doctrine of ultra vires and on construing objects clauses (main vs. ancillary objects). It firmly imported the Ashbury principle into Indian law and is the standard citation for ultra vires donations and the limits of incidental powers.

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