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This case helps us in understanding that the objectives of a company must be described in the company’s memorandum because a company may only perform acts and execute transactions that are well within the company’s objects, and it is not permitted to do anything that is beyond the company’s objects. The persons who subscribes to the capital of a company i.e. the shareholders or the contributories have to be informed about the objects of the company for which they are investing their hard-earned money because it is this money which is used in case there is a liquidation petition was filed against the company, and generally it is thought by these contributories and shareholders that the company is using its money for the objects defined in the memorandum only. Also, another thing which is important in this case is that ultra vires loan (arising out of ultra vires transactions of the company) are void and in truth have no existence, they do not create any relationship of creditor or debtor and the ultra vires lender do not have any legal or equitable debt against the company.
- A company named Madras Native Permanent Fund Ltd was started in 1878 with a capital of two lakhs which was divided into two thousand shares of Rs. 100 each. Each shareholder was required to pay one rupee a month per share, and at the completion of seven years, he was to get Rs. 100 from the firm, and his account was to be closed; in other words, he was to earn Rs. 100 for paying Rs. 81.
- According to the Memorandum of Association, the company’s objectives were to provide advances to shareholders on the security of movable or immovable property in order to enable them to purchase, build, or repair houses, and to grant simple loans to them to a limited extent, as well as to do other things incidental to the achievement of the above objects.
- A new branch known as deposit branch was established in 1887 which was distinguished from the loan branch i.e. the branch that looked after the company’s original activities and its name was also given in accordance with it.
- The company’s capital was increased by Rs.10, 000 which was in turn divided into a thousand shares of Rs. 10 each, and these newly raised shares were assigned to the Deposit Branch. Accounts and dealings of each branch were kept separate. Ultimately though the loan branch stuck to its original objectives, but the deposit branch was converted and developed into a bank that carried out all the activities of a banking business. There were deposits and advances being made at the Deposit Branch, with clients depositing money and loans being advanced on jewel pledges whose customers were both members as well as strangers.
- This process continued for about 40 years when finally the company realized there were irregularities being conducted in their affairs such as loans being advanced on jewels of insufficient value etc. As a result of this the company suffered a huge loss and depositors weren’t able to get back their money. In light of these in May 1927 a liquidation petition was filed and a compulsory order was made in regard to it.
- In the concerned money suit, Judge Waller observed that that the loan branch is nothing more than a mutual benefit organisation, with regulations similar to those of the Mylapore Hindu Permanent Fund and that 327 persons in the situation cannot be treated as contributories. According to the learned judge, it was not unlawful for the company to close the accounts of the Loan Branch shareholders at the end of seven years by paying them Rs. 100.
- The appellant court however in previous hearings have reversed the order of Judge Waller holding that the payment of the share capital to the members was in violation of the Companies Act since it amounted to a capital reduction which is prohibited by the Act. Accordingly, the 357 persons were held to be contributories. Now the main question before the court which has to be decided was whether the debts which the company sought to make these contributories liable to liquidate were ultra vires of the company.
Whether the debts which these contributories are called upon to liquidate are ultra vires of the powers of the company that is to say, are these amounts due to them debts at all and is the company in the eyes of law lenders and the borrowing company creditors.
From the side of the contributories it was contended that the amounts that the company made itself obliged to refund were those placed by its customers in the Deposit Branch, and the firm effectively turned itself into a bank by accepting such deposits. This activity of the company was claimed to be ultra vires as it constituted going beyond the Memorandum of Association and therefore the contributories cannot be called upon to liquidate the debts.
Summary of Judgement and reasoning of the Court
The court accepted the contention of the contributories and held that the company cannot escape from the fact n that the taking of deposits in the Deposit Branch from strangers to the company was ultra vires of the powers of the company since these activities were beyond the scope of Memorandum of Association.
Since the business of the company was ultra vires the transactions done by it were also ultra vires and ultra vires transactions do not create any debt either legal or equitable as was held in the case of Re: Birkbeck Permanent Benefit Building Society. The court took the reference of this case because the facts of it resembled that of present case i.e. a building society carried on a banking business altogether beyond what was authorized and the court held that the loan contracts were void, even though they were not illegal, and this was treated as the ultra vires borrowing.
In light of all these it was decided by the court that since there was no creation of debt the depositor’s relationship with the company was not that of debtor and creditor. Therefore the contributories cannot be called upon to contribute to the liquidation and the only possible remedy for the person who has paid the money is one in rem and not in personam. The preliminary objection therefore must be upheld and on this short ground the application was dismissed.
The court further said that this decision doesn’t mean that the lenders can in no way recover their deposits. The same case that was cited above also discusses what the rights of lenders are and how and to what extent they can be enforced.
There are no other better claimants of the money in the deposit branch other than the depositors. The Loan Branch, as I have said, was always treated as being separate from the Deposit Branch. Also, the court observed that some trifling amounts were due to some unadvanced shareholders of the Loan branch which was completely separate from the Deposit Branch and there is no reason why they should not be paid the sums due to them from the money to the credit of that branch. Now in terms of depositors whose money is due from the Deposit Branch the court said that since under the orders of the court a sum of over a lakh has been already paid to these depositors it cannot be questioned. Further, as some of the directors are also among the depositors group they must be given a chance to recover the amounts that they have withdrawn during the period of one year before the commencement of the winding up. Since the other depositors have already received 11 annas in the rupee, these directors are only obligated to return an amount equal to five annas of their withdrawals. Even a chart was made by the court to show the amount that the directors were liable to bring back and most of these sums were paid back to liquidators.
Of the Rs 436 specified in the liquidators’ affidavit, Rs. 375 reflects the amount given to them by the first two of the three directors listed in the table given by the court, when calls were made following the ruling of the appeal Court. This sum as well as the sum of Rupees 1347-13-0, together with Rs. 1500 shall be subject to the payment of all proper costs, be treated by the liquidators as the amount available for the distribution among the depositors of the Deposit Branch.
The court further stated that the amount of Rs. 1,955-13-9 in the Loan Branch shall be first dispersed among the unadvanced shareholders of that branch and then if any balance is left over, it shall be carried forward to the Deposit Branch.
The Judgement passed by the court is right and totally justified. The decision in this case is important because it clarifies that a company’s power to do certain acts should only be used for intra vires objectives. It is a general rule laid down in a number of cases that a company is formed for conducting certain objectives and the money of the shareholders are invested in the company only for achieving those objectives. If the company does something that is not permitted by the memorandum of association or is not ancillary to the main objects set forth in the memorandum then that action of the company will be considered ultra vires of the company’s memorandum, and any transaction or contract based on that action will be considered ultra vires as well for which shareholders or contributories cannot be called upon to pay.
The court has looked into every aspect of the situation and has rightly interpreted it in the light of the previous precedents and current laws and has given its judgement according to it. The court has made sure that neither of the parties (the depositors or the contributories) interests and rights are compromised with. It has first looked into the concerns of contributories and looking into various precedent judgements like that of Ashbury Carriage Co. v. Rich and Re: Birkbeck Permanent Benefit Building Society etc held that since company was engaged in ultra vires business i.e. converting and developing the deposit branch into a bank that carried out all the activities of a banking business including advancing loans on jewel pledges and depositing money from clients which was out of what was mentioned in Memorandum of association, therefore the transactions done by them were also ultra vires and these ultra vires transaction do not create any debt either legal or equitable and therefore contributories cannot be called upon to liquidate these debts. Then the court also looked into the concerns of the depositories and held that even though the deposits made by these depositories cannot be held as debts doesn’t in any way mean that the depositories don’t have any right to recover their deposits.
There was a whole table of accounts and solution given by the court by instructing the directors of the company who were also among the depositories to bring back the amounts they withdrew during the period of one year before the commencement of the winding up and to distribute the leftover amounts in the loan branch to the deposit branch to pay back the depositors.
The theory of ultra vires aids in persuading investors and shareholders that the money paid by them is utilized solely for the reasons mentioned in the memorandum of association’s object clause. The doctrine helps in putting up a boundation on directors of the company to not to perform any action for which they are not authorized. Many times the companies try to get around this doctrine by putting up many branches in an organization and running up one branch according to the objects of memorandum of association but deferring from these objects in another branch thereby doing business which are ultra vires. In such a situation to safeguard the interests of the shareholders and contributories it is seen that work of every branch of an organization is according to the objectives set forth in the memorandum of association.