Company Law Methods of Borrowing by a Company | Long-Term | Short-Term
To run a company, money is required. Now, either can be in the form of Capital investment or it can be borrowed from the outsiders. Capital investment can be done by issuing equity shares and whereas money can be borrowed from outsiders’ i.e. external sources can be through issuing debentures, bonds, bank loans, External Commercial Borrowings, etc.
Borrowing basically implies arranging money with the intention of running a business and earns profits and finally returns the borrowed money.
Borrowing means to borrow money. Borrowing can be of many types like short-term borrowing, long-term borrowing, secured borrowing, unsecured borrowing, private borrowing, public borrowing, etc.
Power of the company to Borrow
A company has its own existence and has expressed powers in its articles for borrowing money. Power of company to borrow money is exercised through its directors by passing a resolution of authorizing them to borrow money and the money that can be borrowed should also be specified in that resolution to make the resolution valid.
Unauthorised Borrowing or Ultra Vires Borrowing
When money is borrowed beyond the powers of the company is called ultra vires borrowing. When money borrowed is not under or up to the limit as specified in the resolution or the company is not authorized to borrow money then the money borrowed is beyond the powers of the company. And any act which is ultra vires the company is Void.
When an act becomes Void then the third party cannot sue the company and the void act cannot even be ratified by passing a resolution later in the general meeting. However, the third party has following remedies in case of Ultra vires borrowing:
- Injunction and Recovery: Injunction means stopping someone from doing something usually through the court order. Here, if the lender knows that the money has not been spent then he stops/restrains the borrower from spending the same.
- Subrogation: Subrogation is a legal right to legally pursue a third party that caused an insurance loss to the insured. When the lawful debts are paid from the ultra vires borrowed money, he would be subrogated to the position of the creditor paid off and to that extent would have the right to recover his loan from the company.
- Suit against Directors: Lender may sue the directors of the company for breach of warranty of authority, especially if the directors deliberately misrepresented their authority.
Practice MCQs of Borrowing and other topics by clicking Advanced Company Law and Practice notes.
Intra Vires Borrowing but outside the scope of agents authority
Company’s power of borrowing the money is different from the authority of directors of the company to borrow. When the money borrowed is beyond the authority of the company but is within the powers of the company then the money is not ultra vires the company but is called Intra vires the company. The company is liable to the lender if the borrowing is within the director’s ostensible authority and the lender acted in good faith or if the transaction was ratified by the company.
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