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Borrowing power of a company and its limits as per Indian Companies Act, 1956

It is a common practice in many companies to give unsecured loan to the companies in the same group. To avoid any kind of questions about such transactions, it is necessary to keep in mind the statutory limits while executing such transactions. A company has express and implied power to borrow as per the limits laid down in the Memorandum or Articles.


Memorandum of Association of modern companies does no limit the amount which they borrow. Articles of companies generally limit the amount the directors may borrow without obtaining the consent of the shareholders meeting. The powers of directors to borrow are subject to the following limitations:


1.   Statutory Limitation:

Section 291(1)(d) of the Indian Companies Act, 1956 prohibits the directors from borrowing an amount beyond the aggregate of the paid up capital of the company and its free reserves.  If any debt incurred by the company is in excess of this limit, the debt will not be valid  on effective, unless the lender proves that the loan was advanced in good faith and without the knowledge of the fact that the limits imposed by the relevant clause had been exceeded.


2.   Limitation under Memorandum or Articles

The Directors have to observe the limitation of borrowing powers laid down in the Memorandum or Articles of the Company


Ultra Vires the Company

Borrowing by the company beyond its powers or beyond the limits fixed in the Memorandum, such borrowing is ultra Vires the company and the securities given for the same are inoperative. In such case the contract is absolutely void and incapable of ratification, even if every member of the company purports to rectify it. The lender has no legal or equitable debt against the company.


Ultra Vires the Directors

Where the directors are conferred with limited powers of borrowing, but they borrow exceeding their power, the borrowing is irregular and securities in that behalf are inoperative. Such borrowing Intra Vires the company, but Ultra Vires the directors. Such borrowing may be rendered valid by ratification by the company.


When the director of a company is not authorized to borrow, but has borrowed money which is not necessary, neither bonafide, nor the benefit of the company, the company will not be liable for the borrowed sum.


Power to give security

When a company exercises its borrowing power, it can give security by mortgage or change on all or nay of its property. It is well settled that the borrowing powers of a company include power to mortgage or charge the assets. A company cannot borrow on the security of reserve capital.


Any charge on the assets of the company should be informed to the registrar of companies by filing form No. 8 within 30 days. The Registrar of Companies has the power to condone the delay by 30 days. For any delay beyond 60 days you have to approach the Company Law Board for condo nation of delay.

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