Understanding the Borrowing Power of Companies
Companies rely on borrowing to operate effectively, with specific provisions in their memorandum or articles governing this power. Directors have the authority to borrow within defined limits, and statutory regulations prescribe borrowing limits. However, borrowing beyond the company's legal capacity can have significant consequences, rendering the contract void and unenforceable. Explore the intricacies of company borrowing and the implications of ultra vires borrowing in this comprehensive guide.
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Presentation Transcript
INTRODUCTION A Company cannot liveon its own flesh all The time . It has to depend on borrowing from outside . A company in this respect is not on the same footing as an individual or a partnership firm . The power to borrow in the case of a company is generally specified either in the memorandum or in the articles of the company. 2
MEANING The borrowing power legal capacity of an incorporated firm to put itself into debt . Directors of a firm are generally given the power to borrow on its behalf but, as defined in the firm s bylaws or memorandum of association, certain limit are placed on their ability to do so. 3
A Company is empowered to borrow money if The company clause permits the company to borrow money It is a trading company 4
Restriction on power of a company to borrow Where the company has express or implied power to borrow , its director may from time to ,borrow any amount ,subject to the restriction imposed by the memorandum or the articles . Such power may be delegated by board of director ,provided The resolution delegated the power to borrow money is passed at a board meeting The resolution of the board shall specify total amount that may be borrowed at any one time. 5
Statutory limit on borrowing The company act 2013 ,prescribes, however ,a statutory limit upon the borrowing power of director. Sec 180(1) provides that the directorof any company, shall not borrow moneys. Exceeding the aggregate of paid up capital and free reserves. Except with the content of such company in general meeting. 6
Consequences of borrowing ultra vires the company When a company has no borrowing power,or where the memorandum of association fixes a limit on the borrowing power of the company , any borrowing in the first case and any borrowing in excess of such limit in the other case is ultra vires the company. In such a case the contract is void initio and the lender cannot sue the company for the return of the loan. the company cannot ratify the ultra vires loan by resolution in general meeting. 7
ULTRA VIRES BORROWING A borrowing which is ultra vires the cmpany. A borrowing which is intra the company but ultra vires the director 8
THE LENDER HAS THE FOLLOWING REMEDIES If a lender intervenes before the money has been spent, he has a right to follow his money and to be obtain an injunction restraining the company from parting with it. INJUNCTION INJUNCTION If the money borrowed ultra vires has been used to pay off legitimate debts of the company. He can sue the company by virtue of principle of subrogation. SUBROGATION SUBROGATION A building society became indebted to some of its members for principal and interest due on a mortgage. It borrowed money ultra vires to pay off principal and interest . It was held that the lender were subrogated to the rights of the creditors paid off. EXAMPLE EXAMPLE 9
If the money lent to the company can be traced in the hands of the company In original form or even if it has been employed for the purchase the property which is still capable of identification , the ultra vires lender can obtain of tracing order and may claim that asset or money. IDENTIFICATION AND TRACING The lender may be hold the directors personally liable for contracting an ultra vires loan of the company. The director liable for damages to the lender for the breach of the warranty of authority. RECOVERY OF DAMAGES 10
Borrowing intra vires the company but ultra vires the directors By relying on the rule in Royal British bank v.Turquand he can recover the Amount of loan from the company provided the borrowing was due to non compliance with some internal regulation of the company. DOCTRINE OF INDOOR MANAGEMENT A company can avoid the liability on the ground that borrowing was known or deemed to be known to be ultravires .the company liable for the unauthorised borrowing of its director. No notice for unauthorized business D 11
