Explain the borrowing powers of the company.

Explain the borrowing powers of the company. When may a company lawfully borrow money? What are the the restrictions on the borrowing powers of a company?

Ans.

BORROWING POWERS OF THE COMPANY

Borrowing is an ordinary function of a company. Every company has power to borrow money for his business and it has also right to pledge its assets as a security. It is implied power of the company. A private company can use this right just after receiving the certificate of incorporation while a public company may utilize its right of borrowing after receiving the certificate of commencement of business. However, a public company can issue debentures just after obtaining the certificate of incorporation.

A trading company unless restricted by its MOA or AOA, has implied power to borrow money. It can give security to take loan by creating a mortgage or charge on its property.

Company has power to borrow subject to the limits ‘determined by the MOA or AOA.

Borrowing power is exercised by the Board. v. Directors may not borrow money beyond the aggregate of paid-up capital and free reserves unless Board has obtained permission of the company in general meeting.

RESTRICTIONS ON BORROWING POWERS OF THE COMPANY (SEC. 180)

1. The Board shall not, except with the consent of the company by a special resolution.

(a) to sell, lease or otherwise dispose of the whole, or substantially the whole of the undertaking of the company,

(b) to invest, otherwise than in trust securities,

(d) to remit, or give time for the re-payment of, any debt due by a director

2. Nothing contained in clause (a) of sub-section (1) shall affect –

(a) the title of a buyer or other person who buys or takes on lease any properly, investment or undertaking as is referred to in that clause, in good faith; or

(b) the selling or leasing of any property of the company where the ordinary business of the company consists of, or comprises, such selling or leasing,

3. Any special resolution passed by the company permitting any transaction such as is referred to in clause (a) of sub-section (1) may attach such conditions to the permission as may be specified in the resolution, including conditions regarding the use, disposal or investment of the sale proceeds which may result from the transactions:

Provided that this sub-section shall not be deemed to authorize the company to effect any reduction in its capital except in accordance with the provisions contained in that behalf in this Act.

4. No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section (1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded.

Company to Report Satisfaction of Charge [Section 82] – A company shall intimate to ROC in the prescribed form of the payment of satisfaction if full of any charge registered within a period of 30 days. The ROC shall cause a notice to the holder of charge calling upon him to show cause within not exceeding 14 days.

Section 85 of the Companies Act, 2013 requires each company to maintain a register of mortgage and charges. It must be made available for inspection to the members and debenture holders free of cost and to others on payment of prescribed fee.