Borrowing by a company shall be deemed to be ultra vires where the company borrows
inspite of no power to borrow or borrows beyond the limit fixed by the
Memorandum or Articles. Any such loan to the company is null and void and does
not create an actionable debt. However, the following remedies shall be
available to such a lender:
1. Injunction and recovery. If the money,
assets, property, etc., purchased with such money is identifiable and are still
in the possession of the company, the lender can obtain an injunction to
restrain the company from parting with them and seek a tracing order to trace
and recover them.
2. Subrogation. If the borrowed money was
applied in payment of lawful creditors of the company, the lender can subrogate
to the rights of those creditors, i.e., he will step into the shoes of the old
creditors for the purpose of recovering his money [Sinclair v. Brougham (1914) A.C.398]. However, he shall not have
any priority over other creditors even if the debts paid off had priority [Re Wirexhan Mold & Cohmah’s Quau Rly.(1899)
1Ch. 440}.
3. Suit against the directors. The lender
may claim damages from the directors and sue them personally for a breach of
warranty of authority [Firbank’s
Executors
v. Humphreys (1866) 18 O.8.D.64]. But if the fact that the company has no
powers to borrow was apparent upon reference to the company's memorandum or
articles, the lender shall not be entitled to claim damages from directors upon
this ground as he was not misled because he is deemed to have knowledge of
these public documents [Rashdall v. Ford
(1855) E.R.Q. Fq Cas. 750].
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