Borrowing Powers of the Director

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The Memorandum of Association of almost every Company contains a power, authorising it to borrow money for carrying on its objects. A trading or commercial Company has an implied power to borrow, i.e. it can borrow even if no power is specifically conferred by its Memorandum of Association. The Memorandum of a non-trading Company must confer an express power to borrow.

Borrowing power [Sub-section (1) (c)]

The borrowing power of the directors is subject to the provision of section 293 (1) (d) and articles of association of the company. Where articles allow borrowing by directors, the transaction of borrowing will come within the power of directors. In case of bank borrowing, Explanation 11 to sub- section (1) gives different meaning from that which is understood ordinarily. While there is no borrowing until money is actually received by the company, this is not so in case of bank borrowing. Explanation 11 lays down that borrowing shall mean the limit, sanctioned by the bank and not the amount actually drawn from the bank account. Where the bank sanction rupees 1 Crore as cash credit facility and the company actually draws Rupee Fifty Lakh, only then for the purpose of this section rupees 1 Crore shall be treated as borrowing.

A trading or commercial company can borrow money, even in absence of any express authority in its Memorandum of Association. However, there must be express power to borrow in case of a non- trading Company.

In case where no resolution was passed authorising a director to enter into a transaction on behalf of the company by the board, a claim of a creditor could not be affected if the Memorandum and articles authorised such transaction. This is because the person, dealing with a company, is entitled to presume that all the formalities in connection therewith have been complied with.

Where the money borrowed is used for the benefit of the principal, the company cannot repudiate its liability to pay the debt on the basis that the agent was authorised to borrow.
Loans in excess of the authority of directors are not ultra vires.