08 MFM Borrowings

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BORROWINGS

Every trading co., unless prohibited by its Memorandum and Articles, has implied

powers to borrow money for the purposes of its business. It has also the power to give

security for the loan by creating a mortgage or charge on its property.

When a company has express or implied power to borrow, it can borrow subject to the

limits set by the Memorandum and Articles.

A non-trading company has no implied power to borrow. It requires express power to

do so. This power, in case of such a company, must be taken in the Memorandum or

Articles.

A public Co. having share capital cannot exercise borrowing power unless certificate ofcommencement of business is obtained by it [Sec.149(1)]


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Borrowing Ultra Vires the Co.

If the co. borrows money beyond its express or implied powers, the borrowing is ultra

vires the company and is void. No debt is created and the securities given in respect

thereof are inoperative and void, and no ratification can render the debt valid.

Lenders right when borrowing is ultra vires

1. Injunction

2. Subrogation

3. Identification and tracing

4. Recovery of damages


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Borrowing- Intra vires the Co. but

Ultra Vires the directors

If the borrowing is in excess merely of the powers of the directors but not of the

company, it can be ratified and rendered valid by the company. In such a case the loan

binds the lender and the company as if it had been made with the companys authority

in the first place. If the company refuses to ratify the directors act, the normal

principles of agency apply. A third party who deals with an agent knowing that the

agent is exceeding his authority has no right of action against the principal. However if

the excess borrowing consists of non- compliance with some internal regulation of the

company, the lender may rely on the rule in Indoor Management , and recover the

amount of the loan from the company.


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Debentures

Characteristic features of a debenture:-

1. It is issued by a company and is usually in the form of a certificate which is an

acknowledgement of indebtedness.

2. It is issued under the companys seal. It need not, however, be necessarily under

the companys seal.

3. It is one of a series issued to a number of lenders. But a single debenture is also not

uncommon. Thus, a mortgage of a companys property to a single individual as

security for a loan is a debenture within definition given earlier.

4. It usually specifies a particular period or date as the date of repayment. It also

provides for the payment of a specified principal and interest at the specified date.

But a company is not debarred from issuing perpetual or irredeemable debentures.

5. It generally creates a charge on the undertaking of the company or some parts of

its property; but there may be debentures without any such charge

6. A debenture holder does not have any right to vote in the company meetings


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Characteristic features of a debenture

1. It is a movable property

2. It is issued by the company and is in the form of a certificate of indebtedness.

3. It usually specifies the date of redemption. It also provides for the repayment of

principal and interest at specified date and dates

4. It generally creates a charge on the undertaking or undertakings of the company.

Usually the words pari passu appear in the terms and conditions of debentures. this

means that all the debentures of a particular class will receive the money

proportionately in case the company is unable to discharge the whole obligation.

In the absence of this clause the debenture holders would rank in accordance

with the rank of the issue and if issued on the same date then in order of the time

when they were issued.


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Debenture stock

A company, instead of issuing individual debentures, evidencing separate and distinct

debts, may create one loan fund known as debenture stock divisible among a class of

lenders each of whom is given a debenture stock certificate evidencing the parts of the

whole loan to which he is entitled.

This debenture stock, which is analogous to the loan stocks of Government and local

and public authorities, is then the indebtedness itself, and the certificate evidences the

stockholders interest in it. A consequence of the distinction is that whereas a debenture

is a single thing which can be legally transferred only as one entity, debenture stock can

be sub divided and transferred in any fractions which the holder wishes. One more

distinction between the two is that while debenture-stock must be fully paid,

debentures may or may not be fully paid.

However for the purpose of the companies Act, debenture includes debenture stock.


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Issue of Debenture

Debentures are commonly issued in a similar manner as shares by

means of a prospectus inviting applications, the money being

usually payable by installments on application, allotment and on

specified dates. The power to issue debentures rests with theBoard of Directors.

Debentures may be issued at par, at a premium or at a discount,

unless Articles specifically forbid issue of debentures at discount.

The company must complete and keep ready for delivery the

debenture certificates within 3 months of allotment, unless the

terms of issue provide a longer period.


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Kinds of Debentures

1.Bearer debentures2.Registered debentures

3.Secured debentures

4.Unsecured debentures5.Redeemable debentures

6.Irredeemable debentures

7.Convertible debentures8.Non- convertible debentures


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Remedies Of Debenture- Holder

Unsecured Debenture Holder :-

1. He may sue for his principal and interest

2. He may, if he wishes, petition under Sec. 439 for the winding up of the company

by the tribunal on the ground specified in Sec. 433, namely, that the company is

unable to pay the debts

Secured Debenture holder :-

A secured debenture holder has both the above remedies, but in addition he has also

the following courses open to him :

1. Debenture holders Action

2. Appointment of receiver3. Foreclosure

4. Sale

5. Proof for the balance


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Creation of charges

The debt owned by a person to another may be either unsecured

or secured. In the former case, if the debtor defaults, the creditor

can sue for the amount owed, i.e. he has a right of action. If the

debtor becomes insolvent or disappears, the creditor has nosecurity. A wise creditor will therefore demand security, i.e., a right

over the debtors property which is in addition to his right of

action. A bank overdraft, for instance, is often secured by deposit

of title deeds of the borrowers house or his share certificate. A

company like any other person can, when it borrows money, giveits creditors security. Often it mortgages or charges its property to

its debenture holders.


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Fixed and Floating Charges

Fixed charge:-a fixed or specific charge is one which is created on some specific and

definite assets of the company, e.g., a charge on land and building. It precludes the

company from dealing in the property without consent of the holder of the charge.

The company can if it wants to deal in that property, do so subject to the charge.

Floating charge:-A floating charge is equitable charge which is created on some class of

property which is constantly changing. E. g. a charge on stock in trade, etc. the

company can deal in such property in the normal course of its business until the

charge becomes fixed on the happening of an event. The main idea behind a

floating charge is to allow the company to carry on its business in the ordinary

course as if no charge had been created

Debentures usually create a floating charge on the assets of a company.


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Characteristics of a Floating Charge

1. It is a charge on a class of assets of the company both

present and future.

2. That class of assets is one which, in the ordinary

course of the business of the company, is changingfrom time to time.

3. It is contemplated by the charge that, until some

steps are taken by on behalf of those interested in the

charge, the company may carry on its business in

ordinary way.


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Crystallization of a Floating Charge

Crystallization is the conversion of a floating chargeinto a fixed charge on the assets charged at the

moment of crystallisation

A floating charge crystallises or gets fixed when

1. The company goes into liquidation

2. The company ceases to carry on business, or

3. A receiver is appointed, or4. A default is made in paying the principal and/ or

interest and the holder of the charge brings an

action to enforce his security.


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Registration of Charge

The following charges shall be registered with the registrar :-

a) A charge for the purpose of securing any issue of debentures

b) A charge on uncalled share capital of the company

c) A charge on any immovable property, wherever situate or any interest

therein

d) A charge on any book debt of the company

e) A charge, not being a pledge, on any movable property of the company

f) A floating charge on the undertaking or any property of the company

including stock in trade

g) A charge on calls made but not paid

h) A charge on goodwill, on a patent or license under a patent, on a trademark or on a copyright or on a license under a copyright


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Register of charges to be kept with the

Registrar

The Registrar shall, with respect to each company, cause to be kept a register

containing all the charges requiring registration and shall on payment of the

prescribed fee, cause to enter in the Register with respect to every such charge the

following particulars :-

1. The date of its creation;

2. The amount secured by the charge;3. Short particulars of the property charged; and

4. The persons entitled to the charge.


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Inter Company Borrowings


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Ceiling on loans, guarantees, investments etc.

No company shall directly or indirectly, --

1. Make any loan to any other body corporate;

2. Give any guarantee, or provide security, in connection with a loan made by any

other person to, or to any other person by, any body corporate; and

3. Acquire, by way of subscription, purchase or otherwise the securities of any other

body corporate,

Exceeding 60% of its paid up share capital and free reserves, or hundred percent of itsfree reserves, whichever is more


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Approval by way of Special Resolution

Where the aggregate of the loans and investments so far made, the amounts for

which guarantee or security so far provided to in all other bodies corporate, along

with the investment, loan, guarantee or security proposed to be made or given by the

Board, exceeds the aforesaid limit, no investment or loan shall be made or guarantee

shall be given or security shall be provided unless previously authorized by a special

resolution passed in general meeting


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Rate of Interest

No loan to any body corporate shall be made at the rate of interest lower than the

prevailing bank rate being standard rate made public by the Reserve Bank Of India

**Bank rate means the rate at which the RBI lends to the commercial banks


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Documents

08 MFM Borrowings