Borrowing Ultra- Vires the Directors but Intra- Vires the Company

Strictly speaking; the terms ‘intra-vires’ and ‘ultra-vires’ should be used to describe the company’s capacity and should not be used with reference to the Directors’ authority. However, where company has a power to borrow as per its Articles and Memorandum but certain limits have been imposed on the authority of Directors, for instance, Articles of a company may provide that: “the director’s power to borrow shall be limited to Rs. 5,00,000 only”. For borrowings beyond this amount they shall have to seek the prior approval of the general body of shareholders. Besides, under Section 293, Directors cannot borrow beyond the aggregate of paid-up capital and free reserves unless approval of the shareholders has been obtained. However, the restriction does not extend to temporary overdraft from a bank in the ordinary course of business. In such a case borrowings beyond the specified amount without general body’s approval shall be ultra-vires the Directors. The legal position in such cases may be noted as follows:

1. If the lender was aware of the lack of authority on the part of Directors, he will have no right of action against the company.

2. But where the Directors, under the Articles could exercise the borrowing powers subject to certain approvals, the lender could rely on the doctrine of indoor management that the necessary approvals would have been obtained [Royal British Bank Vs. Turquand (1956)]. The company shall be bound in such cases.

3. The company shall be held liable if the money borrowed by Directors beyond their authority is used for the benefit of the company [Krishna Kumar Rohtagi V s. State Bank of India (1980) J. The Patna High Court in the said case observed that under general principles of law, when an agent borrows money for a principal without the authority of the principal but the principal takes the benefit of money so borrowed, or when the money so borrowed has gone into the coffers of the principal, the law implies the promise to be paid by the principal. There is nothing in law which makes the principle inapplicable to the case of joint stock companies.

In the aforesaid case, the company borrowed Rs. 5 lakhs from a bank under a promissory note. The repayment of the loan was guaranteed by a person by executing a guarantee. In a suit filed for recovery of the money under promissory note, both the company and the person who had guaranteed the loan denied their liabilities. The company contended that the pronote was executed by the Chairman of the company without there being a resolution of the Board of Directors authorising him to execute the said pronote and as such the company was not liable to pay the amount in question. The court while rejecting the contention of the company directed the company to pay the amount.