Borrowings Power

Borrowing
Every trading company has an implied power to borrow but it is wise to include an express power to borrow in the object clause of memorandum. By expressing borrowing power of the company , the maximum amount can be fixed which can be borrowed by the company.

Exercise of Borrowing Power

Public company cannot exercise its borrowing power until it secure the certificate to commence business Private company may however exercise the borrowing powers immediately after its incorporation. Borrowing power are exercised by the directors but Articles normally , provide certain restrictions on their power to borrow.

ULTRA VIRES BORROWING

Borrowing by company shall be deemed to be ultra vires where the company borrows inspite of no power to borrow or borrow beyond the limit fixed by memorandum or article. if inspite of that company has borrowed then there are certain remedies available to such lenders.

REMEDIES AVAILABLE TO LENDERS

Injunction and recovery Subrogation suit against the directors

Injunction and recovery

If the money , assets , property , etc purchased with such money is identifiable and are still in the possession of the company the lender can obtain an injunction to restrain the company from parting with them and seek a tracing order to trace and recover them.

subrogation
If the money was applied in payment of lawful creditors of the company , the lender can subrogate to the right of those creditors i.e. he will step into the shoes of the old creditors for the purpose of recovering his money .

Suit against the Directors

The lender may sue them personally and claim damages from the directors, but in fact the company has no power to borrow was apparent upon reference to the companys memorandum or article, the lender shall not entitled to claim damages from directors upon this ground as he was not misled because he is deemed to have knowledge of these public documents.