Restriction upon the borrowing powers of a company

Restriction upon the borrowing powers of a company

Every trading company has an implied power to borrow, as borrowing is implied within the object that it’s incorporated. A trading company can exercise this power albeit it’s not included within the Memorandum. However non-trading company has no implied power to borrow and such power are often taken by it implied power to borrow and such power are often taken by it by including a clause thereto effect within the Memorandum.

Definition

The ability to borrow more funds. A person or company with an excellent deal in assets and tiny in debt is probably going to possess greater borrowing power than an individual or company within the opposite position.

Restrictions on borrowing power

•  A public company can borrow only after the receipt of Commencement Certificate. [Section 149(1)]. But a personal company can borrow immediately after the incorporation.

The Board of Directors may borrow moneys by passing a resolution passed at the meetings of the Board. The board may delegate its borrowing powers to a Committee of Directors. Such a resolution should specifically mention the mixture amount upto which the moneys are often borrowed by the Committee, the director , Manager or the other principal officer of the company on such conditions because it may prescribe [Section 292 (1) (c)]

• The moneys borrowed along side the moneys already borrowed by the corporate (excluding loans obtained from banks i.e. working capital) shall not exceed the mixture of the paid up capital and therefore the free reserves. [Section 293(1)(d)]
•  it’s going to be noted that a corporation may borrow in more than its paid up capital and free reserves if it’s so consented and authorized by the shareholders at a general meeting. Transactions, which are not borrowing.
•  Temporary loans (repayable within six months or on demand) obtained from the company’s banker within the ordinary course of business.
• Borrowing of cash by a depository financial institution within the ordinary course of business.
• Hire purchase and leasing transactions.
• Purchase of machinery on deferred payment.
• Ultra Vires Borrowing
• A corporation is claimed to resort to ultra vires borrowing if it exceeds the authority given thereto during this respect by the businesses Act, the Memorandum and therefore the Articles of the company. An act of borrowing by the corporate could also be ultra vires (outside the facility of) the corporate or ultra vires the administrators or ultra vires the Articles.
• Void initially borrowings – Where such loan is ultra vires the corporate , such loan is null and void and doesn’t create an actionable debt. Any securities given in respect thereof are inoperative. Thus, the lender cannot sue the corporate for the return of the loan and shall be under an obligation to return back the securities, if any.

However, if the lender has acted in straightness that’s with none knowledge that the corporate borrowed the cash beyond its powers, he may have the subsequent remedies

1.Injunction- If the corporate has not spent the cash so borrowed, the lender may obtain an injunction order against the corporate restraining it from spending the quantity and recover an equivalent .

2.Restitution- If the cash has been invested in some particular asset, he may claim that asset, or if such asset can’t be ascertained he may claim that any increase in the assets as a results of such borrowing be restored to him within the even of a completing .

3.Subrogation- If the cash has been applied in paying off some debts of the corporate , he’s entitled to step into the shoes of the creditors so paid off and can rank as a creditor of the corporate to the extent of the cash so applied.

4.Suit for breach of warranty- The lender may sue the administrators personally for breach of implied warranty of authority and claim damages for an equivalent .

5.Ratification of borrowing- If the borrowing power exercised by the corporate is ultra vires the Memorandum, that’s beyond the powers given to its by the Memorandum, such borrowing cannot be ratified afterwards in any way, even by a unanimous resolution of the shareholders during a general meeting.

But if the borrowing is ultra vires the Articles, but intra views the Memorandum the act of borrowing are often ratified by the shareholders generally meeting by altering the Articles or by passing a resolution as per Articles.

If the borrowing is ultra vires the administrators but intra vires the Memorandum, that’s within the powers given by the Memorandum but beyond the authority of the directos, the company generally meeting may ratify such act of the administrators . In that case the debt are going to be valid and binding on the corporate.

BORROWINGS & CHARGES

Even if the borrowing isn’t ratified by the corporate , the lender in straightness are going to be protected since the administrators in borrowing the cash had acted as agent of the corporate . However therein case the administrators are going to be susceptible to indemnify the corporate against the loss incurred thereby.

• Even within the case of unauthorized borrowings, the corporate are going to be susceptible to repay, I it’s shown that the cash had gone into company’s pocket [Lakshmi Ratan Cotton Mills Co. Ltd v. J K Jute Mills Co; Ltd (1957) 27 Comp. Cas. 660 (All).]

CHARGES

• Borrowing has become an equally important method along side share capital of financing projects. Corporate borrowing has its own peculiarities. No single individual may in normal circumstances be during a position to satisfy the loan requirements of a corporation . Loan-money has, therefore, to be raised from an outsized number of people considerably within the same way as share capital. Loans may need to be obtained during a sequence one after the opposite .

The problem was solved by the evolution, on the one hand, of debentures and, on the other, of the concept of floating charge, both being reserved only for the corporate sector. The same assets are charged to several lenders and also to several lenders in a series. That raises a question as to who shall have priority. This gave rise to the concept of pari passu ranking. Since other trade creditors have also to seek payment only out of the company’s assets, the problem had to be tackled as to how they should know, before supplying more credit, what assets would be available as security for their payments?

•  The Act prescribes for registration of charges with the Registrar of Companies, and also gives a list of assets a charge on which must be registered. Registration of charges identifies the assets, which are subject to the charge. It becomes a source of knowledge, and, therefore, operates as constructive notice and a protection, to “all classes of persons interested in knowing the assets position of the company. It makes the charge effective against all quarters including the liquidator.

Types of charges

2. Fixed charge – a charge is fixed when it is made specifically to cover definite an ascertained assets of permanent nature such as land, building, o heavy machinery. A fixed charge passes legal title to certain specific assets and the company loses the right to dispose of the property unencumbered, though the company retains possession of the property.
3. Floating charge – it is a charge on the current assets of the company, present or future which

changes from time to time in the ordinary course of business e.g. stock in trade, bills receivable, cash in hand, work in progress, goods in transit, inventory etc.

(i) When the company goes into liquidation;

(ii) When the company ceases to carry on the business;

(iii) When the creditors or the debenture holders take steps to enforce this security e.g. by appointing receiver to take possession of the property charged;

(iv) On the happening of the even specified in the deed.

Registration of charges[Section 125]

• The security created and charged for the following purposes must be registered with the ROC within 30 days (or further period of 30 days with additional fees) after the date of their creation:

(i) Securing any issue of debentures;

(ii) Uncalled share capital of the company;

(iii) Any immovable property;

(iv) Book debts, stock in trade or other current assets of the company;

(v) Any movable property (not being a pledge);

(vi) Calls made but not paid;

(vii) IPRs of the company.

• The ROC shall with respect to each company maintain a Register of charges containing all the specified particulars. Upon registration of charge by the company, ROC shall issue a Certificate of charges, which shall be conclusive evidence.

Memorandum of satisfaction[Section 138-140]

• On payment or satisfaction of any charge in full, the company must notify the fact to the ROC within 30 days from the date of such payment or satisfaction. The ROC shall on receipt thereof, shall record the same after send due notice to the concerned creditor and on receipt on him being satisfied (the creditor may issue NOC to the satisfaction) shall register the satisfaction of the charge. A memorandum of satisfaction shall be entered in the Register by the ROC.

The Central Government has been empowered to extend time for registration of charge or satisfaction of charge of issue of debenture of a series and to order that the omission or mis-statement in the Register of Charges be rectified.

Author: Pragya Sinha,
Symbiosis law college,nagpur . 1st year