Brief note on ultra vires borrowing in a company



Where a company has no borrowing powers, or where the memorandum of association fixes a limit to the borrowing powers of the company, any borrowing in the first case and any borrowing in excess of such limit in the other case is ultra-vires the company. In such a case the contract is void and the lender cannot sue the company for the return of the loan. The securities given for such ultra-vires borrowing are also void and inoperative.

The lender has, however, the following remedies:

1. Injunction:

If a lender intervenes before the money has been spent, he has right to follow his money and to obtain an injunction restraining the company from parting with it.

2. Subrogation:

If the money borrowed has been used to pay-off debts which could have been enforced against the company, the lender may sue the company being subrograted to the rights of the creditors who were paid-off. This is based upon the principle that a company which borrows to pay-off existing debts does not thereby increases its liabilities.