S. Sivashanmugham and Others vs Butterfly Marketing Private Ltd.

R. Jayasimha Babu, J.—This appeal is directed against the order of the learned trial judge dated November 22, 1994, in C. S. No. 1282 of

1993 which was a suit u/s 20 of the Arbitration Act, 1940, and had been filed by the respondent herein Butterfly Marketing Private Limited. By

the impugned order, the learned trial judge directed the appointment of the arbitrator for the purpose of deciding the disputes between the parties

to the suit. The other parties to the suit as defendants Nos. 1 to 6 along with the plaintiff were parties to a partnership deed dated August 12,

1990, which in Clause 18 provided for resolution of the disputes among the partners by arbitration.

It was the case of the defendants that the partnership deed which contains the arbitration clause was a void instrument, as according to them, the

plaintiff-company had done acts which were ultra vires its memorandum in entering into a partnership deed for the purpose of manufacturing and

exporting garments. Even after taking such stand, the defendants have stated in the pleadings filed by them before the learned trial judge that ""this

honourable court may appoint any arbitrator to enquire into the alleged disputes in the fifth defendant firm, which is Sikora Salvador International

Ltd."". After the learned trial judge directed appointment of an arbitrator, we have been informed by the counsel at the Bar, that the arbitration

proceedings have been concluded resulting in an award in favour of the plaintiff in the suit. It is also stated by counsel that the award is the subject-

matter of a petition filed by the defendants who have applied for having that award set aside.

Notwithstanding the consent given by the defendants to the appointment of an arbitrator and the fact that the arbitration proceedings have in fact

been concluded, it was submitted by learned counsel appearing for the appellant, with great vehemence that the impugned order is liable to be set

aside, as according to him, the company which entered into the partnership, had no authority to do so.

The defendants having given their consent for the appointment of an arbitrator, it is not open to them to turn round now and contend that the

arbitrator should not have been appointed and could not have been appointed. This appeal itself is incompetent.

As learned counsel addressed arguments on the question and the scope of the power conferred on the company under its memorandum of

association, we will briefly advert to that argument although it is not essential to do so. The memorandum of association of the plaintiff-company

shows that the name of the company is ""Butterfly Marketing Private Limited"". The objects are listed in Section III(A). The objects incidental or

ancillary to the attainment of the main objects are listed in (B) of Section III, Paragraph 2 u/s III(B) reads as under ;

To form, establish promote, subsidise aid, acquire, organise, or be interested in any other company or companies, syndicate or partnership for the

purpose of acquiring all or any of the undertaking, property and liabilities of this company or of any share therein by way of exchange for its shares

or otherwise or for any purpose which may seem calculated directly or indirectly to benefit the company.

This clause is in wide terms. It, inter alia, enables the company to form partnership for any purpose which may seem calculated directly or

indirectly to benefit the company. The other objects not specified under caption (A) and (B) u/s III of the memorandum of association are set out

under (C) in item No. 10 which reads is as under :

To carry on the business of importers and exporters commission agents and distributors.

These clauses provide ample power to the respondent-company to enter into partnership with others for any purpose which may directly or

indirectly benefit the company. The company has reserved to itself expressly the power to carry on business of importers or exporters. The

submission made for the appellant that these clauses do not enable the company to form a partnership for the purpose of manufacturing garment is

without any substance. The company not only may carry on business of exporters and importers, but it may also enter into partnership with any

one for any purpose so long as that purpose is regarded by the company as being one which would benefit the company. Such benefit need not be

direct and it may be indirect also.

Interesting arguments were advanced by learned counsel for the appellant as also by the learned senior counsel for the respondent on the

doctrine of ultra vires and the circumstances in which a third party may invoke that doctrine to avoid paying to the company the benefits which the

company was entitled to as a consequence of the alleged ultra vires acts. It was submitted by the learned senior counsel for the respondents that

the doctrine of ultra vires has fallen to the ground in recent times and is no longer a doctrine which comes in the way of contracts being given their

full effect where incorporated companies are parties to such contracts. Learned counsel also invited our attention to the passage from Gower on

Principles of Modern Company Law (fourth edition) wherein the learned author has commented that until very recently there was virtually no

authority as to whether the third party could rely upon the theory of ultra vires to contend that the transaction with the company is void and that, in

the decision cited by the learned author namely the case of Anglo Overseas Agencies Ltd. v. Green [1961] 31 Comp Cas 38 (QB) and Bell

Houses Ltd. v. City Wall Properties Ltd. [1966] 36 Comp Cas 779 (CA) in the court by holding that the ultra vires transaction being void, the

third party can plead and secure protection under the doctrine has added one more absurdity to the list. It has also been noticed by the learned

author that by statutory reforms in the U.K. the ambit of the rule has been curtailed when invoked by a company against a third party--but not

when invoked by a third party.

""Ultra vires doctrine"" is one, as rightly observed by Gower at page 171 is meant to protect the company against itself so as to safeguard its

members and its creditors. We prima facie are of the view that the third party may not take advantage of this doctrine in order to avoid the

performance of the obligations voluntarily undertaken with full opportunity to know the extent of the company''s power before entering into the

transaction. It is however not necessary for us to decide that question in this case as we have found that the provisions contained in the

memorandum of association are sufficiently wide enough to enable the company to enter into partnership with the defendant in the suit.

Counsel for the appellant invited our attention to the decision of the Supreme Court in the case of Dr. A. Lakshmanaswami Mudaliar and Others

Vs. Life Insurance Corporation of India and Another, . That was a case where donation had been made without any authority to do so having

been conferred by the articles. That decision had no application here. Counsel placed before the court a decision of the English Courts in the case

of Argonaut Marine Insurance Company Ltd., In re [1932] 2 Comp Cas 434 (Ch D), the decision of the Chancery Division Jon Beauforte

(London) Ltd., In re [1953] 1 All ER 634 (Ch D) and in the case of Rotted Steel Products (Holdings) Ltd. v. British Steel Corporation [1982] 3

All ER 1057 (Ch D) and an extract from Halsbury''s volumes on companies at para. 1098 (third edition).

It is not necessary to advert these decisions in detail as we have found that the action of the company in entering into partnership was well

within its powers and was not an ultra vires act.

In the result, this appeal is dismissed with costs. C.M. P. No. 11359 of 1998 is also dismissed.