BORROWINGS Incidental to Trading Companies Trading company has an implied power to borrow- need not authorisation by Memorandum, but

t this power may be restricted by memorandum or article of Association. Non-trading company must contain an express power to borrow (how and by whom ) in Memorandum A public company can exercise borrowing powers by its directors by means of resolution passed Board of Directors Articles provide certain restrictions on Director's powers to borrow The restriction on directors power to borrow does not apply to temporary loans (loan repayable on demand or within 6 months from date of loan ) obtained from the companys bankers Unauthorised Borrowings Money borrowed without any power to borrow A. Borrowings ultra-vires the Co. If No borrowing powers, any borrowing will be ultra-vires Borrowings beyond the limit fixed by the Memorandum Excess Borrowings shall be ultra vires the Co. Null and void , not enforceable, no legal or equitable right against co. to recover the loan Cannot be ratified by a resolution passed by a company in a general meetings. LENDERS RIGHTS AGAINST THE COMPANY 1. Injunction- suit for injunction restraining the company- from parting with the money-can get money if not spent and is in actual possession of the company (Ex. Memorandum contains no provision for borrowing- Director Borrowed for purchasing machinery- on knowing the fact-if steps are taken- injunction can be obtained against Co. to part with money) 2.Subrogation- substitution of one person to anotherIf unauthorised money (ultra vires the Co.) is used in paying off companys lawful debt-lender will be subrogated to the right of creditor who were paid off -can recover such money paid by Co.

3. Identification and tracing lender can claim property-purchased or money- if in the hands of co.in its original form or claim proportionate share at winding up . (Ex. a machine purchased from unauhorised money can be taken into possession to realise the money) 4.Recovery of Damages Suit against the director Personally for recovery of damages for exceeding their authority to borrow - but director not liable- if ulrta-vires borrowing could be discovered by memorandum or article Money borrowed in pursuance of ultra-vires object (If company has power to borrow - but borrowed for ultra-vires objectas power to borrow is always incidental to one of object- borrowing is ultra vires ) Personal Guarantee by the director liable to that extent even if loan is ultra-vires- but not liable for illegal loan/ purpose not in Co.s object BORROWING ULTRA VIRES THE DIRECTOR BUT INTRA VIRES THE COMPANY Director exceeding the limit -If ratified by the company- Co liable to pay NOT ratified- general principle of agency will apply & Co liable, if used for the benefit of co.- legitimate business use of the company Borrowing within the powers of company but Director misappropriate- or apply for unauthorised activities company liable if lender does not know about the intended misuse of money Lender knows money is borrowed for business not Co.s object is ultra vires- invalid Methods of borrowing: It include short term borrowings & Long term borrowings: 1. Cash Credits 2. Overdrafts 3. Loans 4. Discounting bill of Exchange

5. Debentures & Shares (long term borrowings) Company may borrow money in the same manner as a natural person It may be loans from financial institutions and banks or by debentures, bonds (fixed amount of debentures ), public deposits See, Sec 2(12) The borrowing may be secured or unsecured (with or without security ) . Secured Borrowing creates a charge on the assets of the the company Creation of charge on the assets of the Company If money lender insist on some security Company can give by creating a charge on its assets Thus, Charge means transfer of an interest (right ) to lender in the assets of the company for the purpose of securing repayment of loan Company has power to create charge on its assets Lender has a right to enforce if amount of loan is not repaid

TYPES OF CHARGES:
Charges may be : Fixed Charge ( transfer of interest/right in definite and ascertained assets/property -land and buildings, heavy machines fixed with the land etc- ) Floating Charge is created on assets/ property of a company both present and future property which is constantly changing- stock in trade , raw materials etc company can deal with such property- without the consent of charge holder- until some steps are taken to enforce the charge ) Crystallisation of floating charges conversion of floating charge into fixed charge floating charge crystalises: when the company ceases to carry on business when company goes into liquidation- wound up when the charge holder brings a legal action to enforce the security on default to pay interest on due date

On crystalisation company looses the right to deal with the property and charge holder can enforce the security charged to him.

Registration of charges: Sec125(4) requires that the following charges when created by a company must be registered with the registrar. 1. 2. 3. 4. Acharge on the uncalled share capital of the company. A charge on the immovable property A charge on book debts of the company. A charge, not being a pledge, on any movable property of the company. 5. A floating charge on the undertaking or any property of the company including stock. 6. A charge on calls made but not paid. 7. A charge on goodwill, on a patent or licence under a patent, trade mark or an copyright or a licence. A certified copy must be filed with the registrar with in 30 days after the creation of charge. The Registrar may, however extend the period of 30 days by another 30 days on the payment of additional fee, if the co. satisfies him that it had sufficient causes for delay. Sec 125(1).

Effects of Non-Registration:
1. The charge would be void against the liquidator and any creditor of the co. Sec 125(1). 2. The debt in respect of which the charge was given remains valid as an unsecured debt. Sec 125(2). 3. The money which the chare purports to secure becomes immediately payable. Sec 125(3) 4. A penalty upto R s. 5000 for every day during ehich the defaults continues may be imposed on the company and its every officer who is knowingly in default. Sec 142(1).