Introduction

• This case deals with the doctrine of ultra vires under the Memorandum of Association (MoA) under Company Law.
• The doctrine of ultra vires means a company cannot go beyond the object and powers expressly or impliedly conferred upon it by its MoA.

Facts

• In this case, United Life Insurance Co. was authorized by its MoA to carry on the business of life insurance.
• The shareholders of the company, in an extraordinary meeting, passed a resolution and sanctioned 2 lakhs to be given as a donation to a Memorial Trust proposed to be formed with the objective of promoting technical or business knowledge.
• Later, the business was taken over by the Life Insurance Corporation (LIC).
  • The LIC called upon the appellant to refund the amount as it was beyond the scope of the company's objectives.
• The Tribunal directed the appellants to pay the amount of Rs 2 lakhs with interest.
• Dissatisfied with this decision, the appellants filed for special leave.

Issues Involved

• Whether the donation was an ultra vires act of the company?
• Whether the appellant is personally liable to pay a refund?

Observation

• The Court emphasized that a company must operate within the confines of its MoA, adhering strictly to its stated objects.
• It clarified that the MoA, like any legal document, should be interpreted reasonably and fairly, without rigid constraints.
  • Directors, as outlined in Clause III, possess the authority to invest and manage company assets as prescribed by the Articles of Association.
• Regarding the MoA, the Court found its terms unambiguous, particularly in Clause III delineating the company's objects and powers.
  • While the Articles can elucidate the MoA, they cannot expand its scope.
• Notably, Clause III(v) permits activities incidental to the specified objects.
• The Court deemed the resolution to donate funds ultra vires, rendering it void and unratifiable, regardless of shareholder consensus.
• Directors involved in such actions incur personal liability, necessitating reimbursement to the company.
• Referencing Section 15 of the Life Insurance Corporation Act, 1956 the Court underscored the Tribunal's authority to demand refunding of unjustly disbursed amounts, holding responsible parties accountable based on their involvement and benefit derived.

Conclusion

• The Court dismissed the appeal and held that resolution was beyond the MoA and ultra vires and the company will be personally liable to refund the amount.