6.1 Borrowing powers of a company

6.1 BORROWING POWERS OF A COMPANY

The borrowing powers of a company refer to its ability to raise funds through borrowing, either from financial institutions, individuals, or other entities. These powers are typically outlined in the company’s constitution, specifically in its memorandum and articles of association. If a loan (or any portion of a loan) is ultra vires the company, it is void, even if it is ratified by the members in general meeting. However, in such circumstances, the lender may have the following remedies.

• If the money has not been spent, he can obtain an injunction restraining the company from parting with it and he can recover it.
• He can bring an action against the directors for breach of warranty of authority.
• If money has been used to pay creditors, the lender may stand in the place of such creditors (this is known as subrogation), but he/she will not get any priority which may have attached to such creditors’ interest.

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.