A company needs money to finance its activities from time to time. A part of this requirement is met by the issue of shares, for the rest the company has to resort to borrowing.
Every trading company has implied power to borrow money for the purposes of its business. Non-trading companies must be expressly authorized to borrow by their MOA (Memorandum of Association) & AOA (Article 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.
Borrowing by a company may be -
• A borrowing which is ultra vires the company or
• A borrowing which is intra vires the company but ultra vires the directors i.e. beyond the scope of the authority.
Borrowing which is Ultra Vires the Company
If a company borrows money beyond its express or implied powers, the borrowing is ultra vires the company and is void. No debt is created and the securities given in respect thereof are inoperative and void, and no ratification can render the debt valid.
• Lender’s rights when borrowing is ultra vires.
Borrowing which Ultra Vires to the Directors
• If the borrowing is in excess merely of the powers of the directors but not of the company, it can be ratified and rendered valid by the company.
• In such a case, the loan binds both the lender and the company as if it had been made with the company’s authority in the first place.
• If the company refuses to ratify the directors act, the normal principles of agency apply.
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