The Companies Act does not expressly empower companies to borrow money and, therefore, most of the companies expressly provide for such borrowing powers in the Memorandum. In such cases, where Memorandum authorises the company to borrow, the Articles provide as to how and by whom these powers shall be exercised. It may also fix up the maximum amount which can be borrowed by the company.
A public company cannot exercise its borrowing powers until it secures the certificate to commence business [Sec. 149 (1)]. A private company may, however, exercise the borrowing powers immediately after its incorporation.
The power to borrow money is generally exercised by the Directors but Articles normally provide for certain restrictions on their power to borrow, to the aggregate of the paid-up capital of the company and its free reserves. Section 293 also limits the power of the Board of Directors to borrow not beyond the aggregate of the paid-up capital and free reserves. It reads: “The Board of Directors of a public company, or a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting borrow moneys where the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company’s bankers in the ordinary course of business) will exceed the aggregate of paid-up capital of the company and its free reserves, that is to say, reserves not set apart for any specific purpose.”
Every trading company has an implied power to borrow (General Auction Estate Co. Vs. Smith) but it is wise to include an express power to borrow in the objects clause of the Memorandum. Non-trading companies, however, must be expressly authorised to borrow by their Memorandum.
A power to borrow whether express or implied includes the power to charge the
assets of the company by way of security to the lender.
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