Name Rahul Chauhan

Roll No. 15060

Topic Short term Borrowings
Submitted to Mr. Siddhartha Fuller (Assistant
prof. of Law)
CONTENTS

Topic Page No.

Introduction 1
Types of Loans 3
Unauthorised Borrowings.. 4
Short term Borrowings. 6
Conclusion. 13
Bibliography 14
INTRODUCTION
The company may needs money for various purposes like for working
capital such as paying wages, bills and etc. or during the time of
financial crisis and other such situations. The companies to overcome
this problem issue equity finance (such as shares) and debt finance
(such as debentures).

The word Debt means money borrowed which is to be repaid in

future and Financing means providing funds for business activities.

Definition: - Debt Financing is when a company borrows money to

be repaid in future with interest on it is known as Debt Financing. It
could be in the form of secured as well as unsecured loans.

For example if a company wants to raise loan of 10 crore it can sell

the bonds or other securities or ask for bank credit, public deposit
and etc. for a fixed period of time with some interest on it.

As per section 293(1) (d) of the Companies Act 19561 the amount up
to which a company could borrow money was laid down in special
resolution which is to be approved by the members in the general
meeting. A company is allowed to borrow any some of money which
is equal to the paid up share capital and free reserves of the

1
Sec 293(1) (d) borrow moneys after the commencement of this Act, 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 the paid- up capital of the
company and its free reserves, that is to say, reserves not set apart for any specific purpose
company, any amount exceeding these criteria must be approved by
a special resolution passed by the members of the company in the
general meeting.

Earlier on Public companies were bound to follow this process of

borrowing monies whereas the private limited companies were
exempted from this requirement and were free to borrow to any
amount exceeding the paid up share capital and free reserves of the
company without any resolution passed during general meeting of
the company, but after the new Company Act 2013, under section
180(2) 2 even the Private Limited Company will have to seek the
approval of the members if they are intending to borrow monies
exceeding their share capital and free reserves.

2
Every special resolution passed by the company in general meeting in relation to the exercise of the powers
referred to in clause (c) of sub-section (1) shall specify the total amount up to which monies may be borrowed
by the Board of Directors
Sec 180 (c) to borrow money, where the money to be borrowed, together with the money already borrowed
by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary
loans obtained from the companys bankers in the ordinary course of business
TYPES OF LOANS
There are different kinds borrowing of methods used by a company to finance
its operations. These types are:-

1) Long term Borrowings The funds which are borrowed for a period ranging
for 5 yrs. or more. It includes bonds payable, Debentures and etc.

2) Short term Borrowings The funds borrowed for this period should be
repaid within 12 months or so. Example public deposits, Instalment credit,
Trade credit and etc.

3) Medium term Borrowings The period ranging from 2yrs to 5yrs is called
medium term borrowings. For examples a company which borrows monies for
purchasing machineries, vehicles and etc. takes medium term loans from the
banks.

4) Secured loans The secured loans are loans against which the assets or any
securities of the company has to be mortgaged in return until the loan is repaid
with interest, if not repaid the security is confiscated by the bank.

5) Unsecured loans The loans against which no property of the company is

required as a security, loans are based on the good credit history of the
Company.

6) Syndicate and Bilateral loans The loans from a group of lending

institutions under a syndicate loan agreements is known as syndicate
borrowings, whereas the loans by a particular
7) Public and Private Loans The loans from the financial institutions such as
banks is called private loans, whereas the loans from the common people for
examples debentures, bonds etc.

UNAUTHORISED BORROWINGS
Where the company borrows the amount beyond its power set out in the
article, it is an ultra vires borrowing. The ultra vires acts are void and any
company which does any ultra vires means of business is also void, and such a
case any contract by the lender is also void and the lender cannot sue the
company for the return of the loans. These money cannot be even be ratified
by the resolution passed by the company during its general meetings, however
the lender has the remedy against it. The remedies are:-

1) Injunction and Recovery The lender can claim his money back if he can
identify his money and any property which is bought by the company from that
money and even if the money cannot be traced then he has to prove that the
company has benefited from his money and can claim repayment. Case law
Madras Native Permanent Fund Ltd. Re3 In this Madras high court held that
Ultra Vires loans are void and are treated as non-existing debt.

2) Subrogation In this way the lender is subrogated to the position of that of

a Creditor paid off and to the extent would have the right to recover loan from
the company, as where the company uses its ultra vires borrowing to pay their
lawful debts, it was decided in the Queen Bench Division in Baroness Wenlock
v. River Dec4

3
(1931) 60 MLJ 270
4
(1887) 19 Q.B.D. 115
3) Suit against the directors - The lender can even suit the Directors of the
company for breach of warranty of their authorities, when they deliberately
misrepresent their authorities as in Executors v. Himphreys5

5
(1866) QBD 44
SHORT TERM BORROWING
It is the amount of loan borrowed by the company which is to be repaid back
within one year, or within the current business operating cycle. Short term
borrowings are also defined in the section 180 (c)6 of Companies act 2013 as
temporary loans. Some common examples of such short term borrowings
are:-

1) Public Deposits the money deposited by the common public with non-
banking companies. These deposits consist as loans from the general people
including the employees and shareholders of the company. This system of
public deposit is more popular than the bank credit as there are less paper
works to be done and it is cheaper as there are no high rates of interests and
etc. It had been followed when the banking system was not that well
developed as it is today.

Advantages-

i) Convenience

ii) Economy

iii) No charge on assets of the company

iv) flexibility
6
(c) to borrow money, where the money to be borrowed, together with the money already borrowed by the
company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans
obtained from the companys bankers in the ordinary course of business
Provided that the acceptance by a banking company, in the ordinary course of its business, of deposits of
money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or
otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of
this clause.
Explanation.For the purposes of this clause, the expression temporary loans means loans repayable on
demand or within six months from the date of the loan such as short-term, cash credit arrangements, the
discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans
raised for the purpose of financial expenditure of a capital nature;
v) Trading on equity

Disadvantages-

i) Uncertainty

ii) Limited appeal

iii) Not available to new firms

iv) Speculations

2) Commercial Banks (Bank Credit)

The commercial banks provide various types of Short term credits:-

a) Loans and Advances The banks provide loans and advances to the firms on
the companys name. The Company can repay the full loan amount in one or
more instalment. The borrower is allowed to pay the interest on the whole
amount from the date of its sanctioning. The loans provided can be secured or
unsecured.

b) Bank credit It is a formal and revolving credit agreement under which the
borrower is allowed to borrow up to a certain limit7. It is a type of a running
account from which the withdrawer is allowed to borrow and repay from time
to time subjected to a stipulated amount. Cash credits are of two types
Secured and Unsecured, the credit which is backed by the securities in form of
a tangible assets or guarantees, whereas the unsecured cash credit is a clean
type of cash credit as it is not backed by any security, under this the borrower
is allowed to submit a promissory note signed by two or more sureties.

7
ISC Commerce by S. Chand
The bank can refuse the cash credit based on the creditworthiness of the
borrower as well as his financial position, the limit to borrowed by the
borrower is decided by that. The firms which have high credit standings are
only allowed to avail cash credit.

c) Bank Overdraft The bank provide overdraft facility to its regular customers
who needs cash on a daily basis example a firm which has a shortage of
working capital. The interest charged on the amount overdrawn and not the
amount sanctioned by the bank.

d) Discounting of bills The banks provide short term finance by discounting

their bills of exchange, promissory notes and hundies, bank charge some
commission for this service by paying lower price than the face value of the
credit instrument8

Advantages-

i) Flexible

ii) Secrecy

iii) Wide choice

iv) No interference in Management

v) Easy repayments

Disadvantages-

i) Legal Formalities

ii) Charge on Assets

8
ISC commerce by S. Chand
iii) Short periods

iv) high rate of Interests

3) TRADE CREDIT

For many businesses, trade credit is an essential tool for financing growth. Trade
credit is the credit extended to you by suppliers who let you buy now and pay later.
Any time you take delivery of materials, equipment or other valuables without paying
cash on the spot, you're using trade credit.9 This type of credit is popular among the
familiar day to day buyers and sellers. Trade credit is generally granted for a period
ranging from 15 days to three months.

Advantages-

i) It very simple and convenient method

ii) No formalities are involved

iii) No interest is paid

iv) More economical and flexible than the bank credit

Disadvantages-

The trade credit is a rare process as it popular among the familiar faces in the business
and the seller has to bear huge risk in the form of bad debts as the buyer is unable to
pay the credit and has a burden of managing his accounts from time to time.

5) Instalment Credit

Instalment credit refers to the facility of buying machinery, equipment and other
durable goods on credit. The buyer has to pay a part of the price of the asset at the
time of delivery and the balance is payable in a number of instalments. The supplier

9
Definition by entrepreneurindia.com
charges the interest on the balance due and the interest is included in the amount of
instalment itself10 . The ownership of the equipment and machinery lies in the hands
of the supplier until the instalment is paid by the buyer.

6) Accounts receivable financing (Factoring)

Accounts receivable financing is a type of asset-financing arrangement in

which a company uses its receivables outstanding invoices or money owed
by customers as collateral in a financing agreement. In this agreement, an
accounts receivables financing company, also called a factoring company, gives
the original company an amount equal to a reduced value of the unpaid
invoices or receivables.11

Factoring companies take several elements into account when determining

how much to offer a company in exchange for its accounts receivables. In most
cases, accounts receivables owed by large companies or corporations are more
valuable than invoices owed by small companies or individuals. Similarly, new
invoices are more valuable than old invoices. Generally, the easier the
factoring company feels a bill is to collect, the more valuable it is, and the
harder a bill is to collect, the less it is worth.

Although factoring offers a number of diverse advantages, it sometimes carries

negative connotations. In particular, financing through factoring companies
typically costs more than financing through traditional lenders such as banks.
As a result, businesses who turn to factoring companies are sometimes
perceived to have poor credit or to being failing financially in other ways.
However, analysts in the industry claim these misgivings are not founded on

10
ISC Commerce by S. Chand
11
Investopedia.com
reality, and they state all manner of upwardly mobile, successful companies
use accounts receivables financing as needed. 12

Inter-Corporate Deposits

When a company borrows funds from another company for example say for 6
months which has surplus funds, it is called inter-corporate deposits. These are
popular as no legal formalities are involved, the identity of the borrower is also
not disclosed in public and even the interest payable depends upon the
amount and time period. The power to lend money is available with big
reputed companies.

12
Investopedia.com
Conclusion
Debt financing is essential for the functioning and growth of the company as
the firm needs funds to meet its day to day expenses and working capitals. The
company can borrow money in the form of debentures and bonds, but it
should be equal to the equity share capital and free reserves of the company
or it will be ultra vires on the account of the companys borrowings. If the
company wants to borrow more than the share capital and free reserves of the
company then it has to pass special resolutions approving it at the general
meeting of its members according to sec. 180 of the companys act 2013.

The companys borrowings are of various types depending on time periods

such as Long term borrowings such as issuing of debentures and bonds for
more than 5 years, whereas the Short term borrowing includes funds
borrowed to be repaid back within 12 months such as bill of discount, public
deposits and etc.

Short term borrowing is flexible as well as economical way of debt financing

which does not include huge paperworks and other obligations such as in
issuing long term debentures, its accounts are written off within one year
period. These credits are based upon creditworthiness of the company and its
reputation and relations with other lenders and financial institutions.

These borrowing may amount to burden on the company as they have to write
it off within one year period and the borrowed amount is much less than the
amount borrowed from the long term loans which lower its working capital of
the company
BIBLIOGRAPHY

Books

ISC commerce vol. 2 by S. Chand

Bare Act of companys law 2013

Bare Act of Companys law 1956

Websites

www.Investopedia.com

www.enterprenureindia.com