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TOP 10 BORROWING POWER OF THE COMPANY

INTRODUCTION

  • Section 180 of the companies act, 2013 provides the provisions related to the borrowing power of the company.
  • The company has the power to raise funds or money or capital from the internal or external sources but within the limitation provided in the Companies act, 2013, MOA (Memorandum of Association) & AOA (Articles of Association).
  • The power of borrowing funds or capital or money is exercised by the BODs (Board of Directors) within the limit authorised in Section 179(3) (c) & (D) of Companies Act, 2013 bypassing Board resolution in the Board meeting.
  • The company may delegated the power of borrowing or raising capital or funds bypassing resolution & duly specified the limit & authorised the following person are:-


  1. Directors Committee;
  2. Managing Director;
  3. Manager;
  4. Any principal officer etc.

WHAT IS BORROWING

  • The term “Borrowing” defines as the method of raising capital or funds or money by any person through issue various short term & long term instrument.
  • The company always preferred those methods of raising capital which is cost very low for the company.
  • The funds borrowed or raised by the company to meet the day to day need of working capital or fixed capital to run a business effectively and successfully.
  • The company borrowed or raised funds or capital or money from Internal Source (Issue of Equity shares, Foreign Direct Investment) & External Sources (Loans, Overdraft by Bank, Debenture, Bonds, Fixed deposits etc.)

TYPES OF BORROWING

SHORT TERM BORROWING

  • The company raised capital or funds for the period of up to 1 year to meet the working capital requirement of business normally.
  • The short term borrowing defines under the head “Current Liability” in the financial accounts (Balance Sheet) of the company & this financial Obligation is expected to be paid within 1 year.
  • The company used the following instruments for Short term borrowing are:-

  1. Commercial Paper;
  2. Loan on stock;
  3. A loan from a financial institution;
  4. Trade credit;
  5. Hypothecation of Debtors.

MEDIUM TERM BORROWING

  • The term “Medium-term borrowing” defines as the Borrowing or raising of capital or funds or money for the period ranging from 1 to 5 years.
  • The company raised funds through medium-term borrowing for financing projects, purchase of land, machinery, vehicles etc.
  • The company raised funds through the following instruments are:-

  1. Preference Shares;
  2. Debenture;
  3. Bonds;
  4. Loans from financial instrument etc.

LONG TERM BORROWING

  • The borrowing or raising of funds or capital by the company whose repayment or tenure will be 5 years or more than these borrowing known as Long term borrowing.
  • The funds raised or borrowed for financing any big project or purchase of Fixed assets, property, plant, land, Machinery, Business equipment etc.
  • The company used the following ways for long term borrowing are:-

  1. Financial Institutions Loans;
  2. Debenture;
  3. Bonds etc.

BILATERAL BORROWING

  • The Loan or funds or capital is borrowed or raised from the lender (banks or Financial Institution) by entering into a Single Contract with Borrower.
  • The Bilateral borrowing is the opposite of Syndicated borrowing & lender risk is higher than syndicated loans.
  • These loans are the less complicated type of loan & used by the small business for the initial funding of their business.

SYNDICATED BORROWING

  • The Syndicated borrowing involves 3 parties (Borrower, mediator & Lender) for the Syndicated Business Loan.
  • These borrowing used to finance big projects or Machinery or Lands & loan provided by the group of person.
  • This borrowing is just opposite of Bilateral borrowing and having high cost to acquire funds due to mediator consultancy fees or commission;
  • The Company entered into a single agreement covering terms & conditions with the group of lenders rather than entering a separate agreement with each bank.
  • This syndicated funds raised by Larger Corporates who need high liquidity for the projects & having a low financial credit history.

SECURED BORROWING

  • The company raised or borrowed funds or capital from the lender by entering into a loan agreement & provide the security or guarantee up to the value of the loan amount.
  • The cost of acquiring Secured funds to the company is less than unsecured funds due to low risk to the lender.
  • If a company fail to pay the loan then lender has the right to sell the property or exercise the guarantee to recover his dues.
  • The company borrow Secured loans from the Banks or Financial institution after providing securities in the form of fixed assets or shares or stock or debtors or fixed deposit.

UNSECURED BORROWING

  • The term “Unsecured Borrowing” used for the funds or capital raised or borrowed by the company from the lender without providing any security or guarantee.
  • The lender doesn’t have any right on the property of the company and he exercises his right to recover dues through settlement or by filing court sue.
  • The lender charges a high rate of interest on unsecured loan due to high-risk factor.
  • The cost of acquiring unsecured loans to the company is less than secured funds because no security or guarantee provided to the lender.

PRIVATE BORROWING

  • The company borrow funds or capital from the private Individual or Bank or Financial Institution or Organisation by entering into a loan agreement.
  • The private lending has higher risks for the lender and borrower.
  • The company has to pay a higher interest rate over the prevailing bank rate in the market & it may be secured or unsecured loan.

PUBLIC BORROWING

  • The company raised funds from the public through private placement or public issue of securities.
  • The public borrowing includes all financial instrument those are freely tradeable on recognised stock exchanges.
  • The cost of acquiring fund is more than other methods of borrowing (loans) from financial institutions.
  • The company raised public funds by issuing the following instruments are:-

  1. Equity shares;
  2. Preference share;
  3. Bonds;
  4. Debenture etc.

FDI (FOREIGN DIRECT INVESTMENT)

  • The foreign person invests the business of the Indian company by investing his funds.
  • The Indian company issued equity shares without voting right to the foreign party who invested in the business of the company.
  • The company prefer to raised funds through FDI without losing his control over the Business.
  • The cost of raising FDI funds is less in comparison to funds raised in the home country.
  • The foreign party invest only in the permitted Indian business as per RBI (Reserve Bank of India) & FEMA (Foreign Exchange Management Act).

ECB (EXTERNAL COMMERCIAL BORROWING)

  • The Indian raise funds through ECB from the non- resident of India in the foreign currency.
  • The cost of acquiring funds through ECB is less or cheaper in comparison to external sources of finance.
  • The ECB is a type of commercial loan raised by the company from outside India at a very low rate of interest without diluting the equity or voting base.
  • The tenure of ECB is a minimum of 3 years & the opportunity to explore the large base of funds exist outside India.

UNAUTHORISED BORROWING BY COMPANY

  • Any borrowing of funds or capital by the company beyond the limit or limitation or authority provided in MOA (Memorandum of Association) & AOA (Articles of Association) of the company shall be treated as Unauthorised borrowing or Ultra Vires borrowing in the companies act, 2013.
  • Any Unauthorised borrowing or Ultra Vires borrowing shall be treated as Void (Not valid) & Parties to the contract cannot sue the company for any loan default.
  • The property or guarantee or security provided against the Unauthorised borrowing or Ultra Vires borrowing to the lender is treated as void & this act cannot ratified by the shareholders in the general meeting by passing a resolution.

REMEDIES TO LENDER FOR ULTRA VIRES BORROWING

The lender has the following remedies for any ultra vires borrowing or Unauthorised borrowing by the company are:-

 

INJUNCTION & TRACING

  • As per the doctrine of restitution he can claim a sanction on the company if he traces and identifies the amount lend by him to the company and company used borrowed amount for its Business purpose or purchasing any property.
  • The only need to traced and identify the use of the borrowed amount even if he is not able to trace the amount of loan.
  • The lender needs to prove that the company used this loan amount for business or personal use & able to recover the amount from the company even if the act is ultra vires.

SUBROGATION

  • The company used the Unauthorised borrowing or Ultra Vires borrowing to pay his lawful debts then the lender is subrogated to the position of creditor paid off & he has the right to recover his loan amount.
  • The main condition to allow subrogation is that the company used the Unauthorised borrowing or Ultra Vires borrowing amount for pay his lawful debts & court protect the lender to recover his dues.

SUE DIRECTORS

  • The lender of the company sues the Directors for breach of trust or warranty by misrepresented the authority of the company to borrowed the amount.
  • If all information related to a company borrowing power as per AOA (Articles of Association) is publically available then lender not able sue director for misrepresentation.
  • It deemed that the lender has full knowledge about the company borrowing power if all the documents of the company are available to the public.

UNAUTHORISED BORROWING BY DIRECTOR

  • The funds or money raised or borrowed by the Director of the company beyond the limit or limitation or authority provided in AOA (Articles of Association) of the company shall be treated as Unauthorised borrowing or Intra Vires borrowing in the companies act, 2013.
  • The unauthorised borrowing by the company is Ultra vires but unauthorised borrowing by the company Director treated as Intra vires because it’s out the authority of company agent.
  • The Intra vires borrowing by the company director can be rectified by the company shareholders by passing a resolution in the general meeting if the lender acted in good faith.

EXAMPLE

  • Director Borrowing Limit as per AOA = Rs. 20 crores.
  • If Director borrows more than 20 cr. require shareholders approval.

Actually director borrow = Rs. 25 cr. without shareholders approval.

So, this borrowing treated as Intra vires or unauthorised borrowing.

 

REMEDIES TO LENDER FOR INTRA VIRES BORROWING

DOCTRINE OF INDOOR MANAGEMENT

 

  • In the case of Royal British Bank v. Turquand (1856) held that if the lender provided the loan amount in the good faith then the company is liable to pay dues to the lender irrespective of intra vires borrowing.
  • The fault of the company internal management to borrow the unauthorised borrowing or Intra Vires borrowing then court saves the dues of the lender.
  • The lender is always deemed to be aware of the director authority because MOA (Memorandum of Association) & AOA (Articles of Association) are public documents so, the company is not liable to pay any dues except the public documents are clear about the authority of the director.

CASE LAWS FOR BORROWING POWER OF THE COMPANY

  • Its always presume that the director doesn’t have more right or capacity than his Company even if the lender provides ultra vires loan to the company then he has no right to claim loan from the company & all the security respect of loan treated as void.
  • The director of the company borrows fund which beyond his power but in certain circumstances, the director is personally liable to the lender because he has the power to borrow funds up to certain limit {Firbank’s Executors v. Humphreys, (1886)}.
  • The company borrowed the funds or capital which beyond company limit than the borrowed amount up to the limit is authorised is not treated as Ultra vires and remaining excess amount treated as ultra vires. {Deonarayan Prasad Bhadani v. Bank of Baroda, (1957)}
  • The shareholders need to accept the excess loan without protest because the amount borrowed by the director is beyond his limit but within the company borrowing limit then the excess debt is treated as valid. {Sri Balasar aswathi Ltd. v. Parameswara Aiyar, (1956)}
  • The company is liable to pay the loan even if the borrowed amount is Ultra vires because the money is credited in the company account. {Lakshmi Ratan Cotton Mills Co. Ltd. v. J.K. Jute Mills Co. Ltd. (1957)}
  • Any large amount or capital or funds is borrowed by the company & its directors within the authorised limit of the company but directors misappropriate the funds then the company is not able to denied to repay the loan amount. {VKRST Firm v. Oriental Investment Trust Ltd., AIR 1944}
  • The company borrowing limit of funds or capital is not provided into the MOA (Memorandum of Association) & AOA (Articles of Association) of the company but directors can’t raise funds beyond the issued share capital of the company without shareholders approval in the general meeting. The Director borrowed funds beyond his limit and money is used by the company to pay his debts or use for business purpose then company not able denied to repay the loan based on director don’t have authority. { T.R. Pratt. Ltd. v. E.D. Sassoon & Co. Ltd.(1936)}
  • Any funds are borrowed by the company director beyond his limit with mala fide intention & funds are not used for company benefits then the company is not liable to pay the amount to the lender. {Equity Insurance Co. Ltd. v. Dinshaw & Co.1940}
  • If the agent borrowed funds on his name & company used this funds for there own benefits then the company is liable to pay loan amount & its is binding upon the company. {SurajBabu v. Jaitly & Co. 1946}

BODs BORROWING POWER WITH SHAREHOLDERS APPROVAL

As per section 180(1) of the companies act, 2013 provides the BODs (Board of Directors) of the company the following power to exercise with the approval of shareholders by Special Resolution in the general meeting are:-

 

  • The BODs sell, lease or dispose of whole or majority of undertaking* EXCEPT The selling or leasing or disposing of in the ordinary course of business Provided the title of the undertaking for buyer or lessee shall remain valid but buy or lease or purchase property in good faith.
  • The BODs sell, lease or dispose of whole or majority of more than one undertaking* hold by the company EXCEPT The selling or leasing or disposing of in the ordinary course of business Provided the title of the undertaking for the buyer or lessee shall remain valid but buy or lease or purchase property in good faith.
  • The company invest the compensation amount in Trust securities & amount is received from any merger or amalgamation.
  • BODs wants to borrow money along with previous borrowed amount exceeds the sum of paid-up share capital & free reserves from the company banker in the ordinary course of business & shareholders specified the borrowing limit of BODs EXCEPT

  1. Temporary loans (Loans payable by the company on demand or within 6 months from date of loan and loan is not used for finance capital or financial expenditure).
  2. In case of banking company who accept public deposit from the public in the ordinary course of business & repayable on demand & withdrawal of money through cheque or draft or order shall not be treated as the borrowing by the company in this section.

  • To provide waiver or extension in repayment of debt due to the company director.

NOTE

 

*Undertaking means

The investment in the undertaking exceeds 25% of company net worth as per preceding financial year audited balance sheet.

OR

The undertaking who generate 25% of company total income during the previous financial year.

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