Presentation on theme: "BORROWING POWERS. Capital is necessary for the establishment and development of a business and borrowing is one of the most important source of the capital,"— Presentation transcript:
Capital is necessary for the establishment and development of a business and borrowing is one of the most important source of the capital, but unfortunately there is no express provision in the Companies Act as to the borrowing powers of the company. Every trading company, unless prohibited by its memorandum or articles, has an implied power to borrow money for the purpose of its business, and to give security for the loan by creating a mortgage or charge on its property even though such power is not expressed in the memorandum of the company.
On the other hand, a non-trading company has no implied power to borrow money and, therefore, it cannot borrow unless such power is expressly provided in the memorandum. If the memorandum does not contain such a power, the memorandum have to be amended before the company can exercise its borrowing powers. Again a public company having a share capital cannot exercise the borrowing powers unless a certificate of commencement of business has been obtained by it.
The Board's Powers The borrowing power is exercised by the board of directors subject to the provisions in the memorandum and articles of the company. The memorandum or articles generally specify the maximum limit of borrowing power allowed to the Board of Directors and may impose restrictions upon the exercise of such power. Section 293(1)(d) also limits the directors' power to borrow. It provides that the Board of Directors of a public company or of a private company which is a subsidiary of a public company, shall not except with the consent of such public company or its subsidiary in a general meeting borrow moneys, where the moneys to be borrowed together with the moneys already borrowed by the company will exceed the aggregate of paid-up capital of the company and its free reserves. Thus, the power of directors to borrow is subject to two main limitation : 1. Statutory limitations 2. Limitations enumerated in the memorandum and articles.
ULTRA VIRES BORROWINGS Ultra vires borrowings mean borrowings which are beyond the powers of the company or the directors. Borrowing by a company may be : 1. Ultra vires of the company, or 2. Intra vires of the company but ultra vires of the directors.
Borrowing which is ultra vires of the company Where a company borrows money in excess of its powers, the borrowing would be ultra vires the company. In such a case, the contract is void and the lender cannot sue the company for the return of the loan. The securities given for such ultra vires borrowings are also void and inoperative, and no ratification can render the debt valid.
Borrowing intra vires of the company but ultra vires of the directors In this case, the borrowings is within the powers of the company but restrictions have been placed on the authority of the directors to borrow. Borrowing ultra vires the directors, but within the power conferred by the memorandum, is voidable only and may be ratified by the company. If the borrowing is ratified, the company becomes liable to repay the money. Whereas such borrowing is not ratified by the company, the remedies available to lender are : 1. Doctrine of indoor management. By relying on the rule of indoor management he can recover the amount of loan from the company provided the borrowing was due to non- compliance with some internal regulations of the company..
2. No notice for unauthorised business. A lender is deemed to have notice of the limitations imposed by the memorandum and articles on the borrowing powers of the directors. A company can avoid the liability on the ground that borrowing was known or deemed to be known to be ultra vires. But if restrictions on the director's authority are secret or not obvious from these documents, or otherwise the lender does not know of it from some other source, the company will be bound. Further, the company shall not be liable for the unauthorised borrowings of its directors if it can establish that the borrowing was neither necessary not 'bonafide' or for the benefit of the company but if a loan has not been taken in the name of the company it will not be liable even if it has received some benefit.