Dr. A. Lakshmanaswami … vs Life Insurance Corporation on 11 December, 1962 – Case Summary

In the case of Dr. A. Lakshmanaswami Mudaliar and Others vs. Life Insurance Corporation, a significant judgment was delivered by the Supreme Court of India on 11th December 1962. The case was presided over by a bench consisting of Sinha, Bhuvneshwar P.(Cj), Gajendragadkar, P.B., Wanchoo, K.N., Gupta, K.C. Das, and Shah, J.C.

Facts of the Case

The United India Life Assurance Company Ltd., of which Dr. A. Lakshmanaswami Mudaliar and others were shareholders, passed a resolution on July 15, 1955, sanctioning a donation of Rs. 2 lakhs from the Shareholders’ Dividend Account to a Trust. This Trust was proposed to be formed with the objective of promoting technical or business knowledge, including knowledge in insurance.

However, on July 1, 1956, the Life Insurance Corporation Act came into force, and all the assets and liabilities of the United India Life Assurance Company Ltd. vested in the Life Insurance Corporation (LIC). The LIC then applied to the Tribunal for relief in respect of the payments of Rs. 2 lakhs by the Company to the appellants, arguing that the 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.

Issues Raised

The central issues raised in this case were whether the donation by the directors was ultra vires, whether the Shareholders’ Dividend Account conferred any proprietary right to the shareholders, and whether the resolution of the company and the acceptance by the appellants of the amount constituted a contract.

Court’s Observations

The court observed that the Shareholders’ Dividend Account did not confer any proprietary interest on the shareholders, even though it was charged for the purpose of paying dividends to the shareholders. The court further noted that the right to dividend depends upon the recommendation to be made by the Directors, without which the shareholders acquire no right to the fund or any part thereof.

The court also held that the meeting in which the resolution was passed was a meeting of the Company, and it could not be contended that it was a meeting of the shareholders in their individual capacity.

Furthermore, the court observed that the resolution of the company and the acceptance by the appellants of the amount did not constitute a contract as there was no consideration to support it.

The court also noted that the object of the company to invest and deal with funds and assets of the company could not authorize the making of the donation and such a power which was not expressly provided for by the memorandum could not be found by reference to the general clause of the Memorandum giving power to do incidental things.

Finally, the court held that the making of donations to the Trust, which may or may not provide indirect or remote benefits to the business of insurance, was not within the power of the company. The action of the Company being ultra vires, it created no legal effect and could not be ratified even if all the shareholders agreed. Payments made pursuant to such action created no rights in the appellants, and they were rightly directed under s. 15 of the Life Insurance Corporation Act to personally refund the amount.

This case serves as a significant precedent in understanding the scope of a company’s powers and the rights of shareholders, particularly in relation to the distribution of dividends and the making of donations.