6.1 Borrowing powers of a company
BORROWING POWERS AND DEBENTURES
Every trading company is deemed to have borrowing powers even if these are not expressly specified the objects clause of its memorandum.
There is no such implied power for a non-trading company and its MOA must lay down such powers enable it to borrow. A company having power to borrow may do so to any extent within the limitations laid down by the MOA and AOA.
Ultra vires
Where a company has no borrowing powers or where the memorandum or articles fix a limit to the borrowing powers of the company, any borrowing in the one case and any borrowing in excess of such limit in the other case, is ultra vires. If a company borrows money beyond its powers the borrowing is ultra vires the company and is void. Where the borrowing is ultra vires the company, the lender has no legal or equitable right against the company.
A company has no power to ratify at void contract even if every member purports to do so. In this case the lender cannot sue the company for the repayment of the loan.
However, a lender of money ultra vires to the company may have the following equitable remedies:
- Proceedings for injunction
If the company has not spent the money so advanced to any transaction so far, a lender may obtain an injunction to restrain the company from spending the money and may recover the money as actually existing.
- He can claim for an order of subrogation
If the money so borrowed is applied in paying off the lawful debts of the company the lender is entitled to step into the shoes of the creditors who have been paid off and be subrogated to their rights. He can thus ranks as a creditor of the company to the extent to which his money has been so applied.
In Neath Building Society Vs Lucey, a building society borrowed money to pay off the principal and interest due on a mortgage. The borrowing was ultra vires. It was held that the lenders were subrogated to the right of the creditors who were paid off and could recover the amount from the company. Similarly, the lenders can retain the securities given to him for such part of the money lent that is equivalent to the legitimate debts paid.
- Identification and tracing
If the money has been so expended in purchasing some particular assets which can be traced into the company’s possession the lender can obtain a tracing order and may recover that asset.
- Recovery of damages
The lender under a transaction, which is ultra vires, may claim damages from the directors personally for a breach of implied warranty of authority unless the fact that the borrowing was ultra vires could have been discovered from the public documents of the company.