BORROWING

POWERS
Companies
Act

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.

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

UNAUTHORIZED OR ULTRA VIRES

BORROWINGS:

Such borrowings may be as:

1.Borrowings ultra vires the company.
2.Borrowings ultra vires the directors.

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.

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 directors 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

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.

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 1956 Act.
Rejecting this contention the PATNA High Court held
that where the directors borrow funds without their
authorization but the money is used for companys
benefit, the company has liability to repay.

TYPES OF BORROWINGS
I. Long term borrowings:
II. Medium term borrowings:
III. Short term borrowings:

Security for borrowings:

Security given by a company falls
under two categories:

1.FIXED CHARGE
2.FLOATING CHARGE

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