Borrowing powers
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This document discusses borrowing powers under company law. It notes that trading companies have an implied power to borrow, while non-trading companies must be expressly authorized to borrow in their memorandum and articles of association. It also discusses unauthorized or "ultra vires" borrowings, noting that borrowings beyond a company's authorized amount are void, though lenders may have remedies against directors or seek to recover funds. Examples of cases related to ultra vires borrowings are provided. Finally, it briefly outlines different types of borrowings and forms of security that can be provided for borrowings.
Borrowing powers
- 1. BORROWING POWERS SOURCES - M. C. KUCHHAL, ICSI (COMPANY LAW), The I C Act 1956 PRESENTED BY: NITIN MANGLA 701 MBA
- 2. BORROWING: Borrow is to receive with an implied or expressed intention of returning the same. Borrowing implies repayment in some time and under some circumstances.
- 3. BORROWING POWERS OF COMPANY A trading company has an implied power to borrow money. Non-trading companies must be expressly authorized to borrow by their memorandum and articles of association. A private company is entitled to borrow immediately after its incorporation. A public company cannot borrow until it secures the ‘certificate to commence business’{sec 149(1)}.
- 4. UNAUTHORIZED OR ULTRA VIRES BORROWINGS: Such borrowings may be as: 1.Borrowings ultra vires the company. 2.Borrowings ultra vires the directors.
- 5. 1. Borrowings which are ultra vires the company: the basic principle of company law is that any act which is ultra vires (unauthorized) the company is, void. The lender cannot sue the company for the repayment of the loan. But the following remedies shall be available to such a lender: (a). Injunction and recovery: he can trace and identify the money lent (b). Subrogation: where the money of an ultra vires borrowing has been used to pay off lawful debts of the company, the lender is entitled to the creditor (c). Suit against director: the lender may be able to sue the director for breach of warranty of authority.
- 6. 2. Borrowings which are ultra vires the directors: In case of borrowings ultra vires the directors but intra vires the company; The company may, if it wishes, in general meeting ratify such act of the directors, in which case the loan shall become perfectly valid and binding upon the company. But if company decides not to ratify the director’s act then the normal principles of the agency will protect the LENDER. Company can claim from the directors. The lender may sue the directors directly
- 7. e.g. Company is authorized to borrow only 5 cr. ₨ but it borrowed via any unauthorized activity more than this i.e.. 5.5 cr. Rs then this access amount is ultra vires to company. CASE I V.K.R.S.T. firm V. Oriental Investment Trust Ltd. Under the authority of the company, its MD borrowed large sums of money misappropriate it. The company was held liable. Where the borrowing is within the powers of the company, the lender will not be prejudiced simply because its officer have applied the loan to unauthorized activities, if the lender had no knowledge of the intended misuse.
- 8. CASE II Krishan Kumar & others Vs. State Bank of India & others The company borrowed an amount of Rs. 5 Lakhs from the bank under a promissory note. In the suit for recovery the company contended the Pro. Note was the executed by the chairman without the resolution of the board of directors as required under {sec292(1)(c)} of the act. Rejecting this contention the PATNA High Court held that where the directors borrow funds without their authorization but the money is used for company’s benefit, the company has liability to repay.
- 9. TYPES OF BORROWINGS I. Long term borrowings: II. Medium term borrowings: III. Short term borrowings:
- 10. Security for borrowings: Security given by a company falls under two categories: 1.FIXED CHARGE 2.FLOATING CHARGE
- 11. Borrowing on security: i. Movable property ii. Bonds iii. Promissory notes iv. Bills of exchange v. Debentures vi. Specific part of property vii.A mortgage of goods viii.Security of book debts ix.Charge on calls but not paid. Etc…