- Slides: 6
BORROWING POWERS OF COMPANY (i) A trading company has an implied power to borrow money unless prohibited by Memorandum or Articles So, non-trading companies must be expressly authorized to borrow by their memorandum and articles of association. (ii) Borrowing would be subject to the limits set by Memorandum or Articles ü A private company is entitled to borrow immediately after its incorporation. ü A public company cannot borrow until it secures the ‘certificate to commence business’.
Ultra Vires BORROWING Borrowing by a company may be(i) borrowing which is ultra vires the company, (ii) borrowing which is intra vires the company but ultra vires the directors
(i) borrowing which is ultra vires the company: - such debts created and securities given in that respect are inoperative and void. Example: Company is authorized to borrow only Rs. 5 cr. but it borrowed via any unauthorized activity more than Rs. 5. 5 cr. then this access amount is ultra vires to company. Lender’s rights when borrowing is ultra vires : - The lender cannot sue the company for the repayment of the loan. But the few remedies are available like: (a) Injunction and recovery of money not spent (b) Subrogation (c) Identification and tracing (d) Recovery of damages
CASE: 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 borrower will not be released simply because its officer have applied the loan to unauthorized activities, if the lender had no knowledge of the intended misuse.
(ii) borrowing which is intra vires the company but ultra vires the directors ü 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. ü But if company decides not to ratify the director’s act then the normal principles of the agency will protect the LENDER. ü Company can claim from the directors. ü The lender may sue the directors directly