HDFC, MUMBAI

I. FUND RAISING BY DIFFERENT KINDS OF COMPANIES

INRODUCTI ON

Company means a company incorporated under this Act or under any previous company
law. 1 Companies mentioned under the Companies Act,2013 and Limited liability Partnership
act,2008 are as follows:

1. One Person Company means a company which has only one person as a member. 2
2. Private company means a company having a minimum paid- up share capital 1 as may
be prescribed, and which by its articles,— (i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two
hundred: Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated as a single
member: Provided further that— (A) persons who are in the employment of the
company; and (B) persons who, having been formerly in the employment of the
company, were members of the company while in that employment and have
continued to be members after the employment ceased, shall not be included in the
number of members; and (iii) prohibits any invitation to the public to subscribe for
any securities of the company. 3
3. Public company means a company which— (a) is not a private company; (b) has a
minimum paid-up share capital 1 as may be prescribed: Provided that a company
which is a subsidiary of a company, not being a private company, shall be deemed to
be public company for the purposes of this Act even where such subsidiary company
continues to be a private company in its articles. 4
4. A limited liability partnership is a body corporate formed and incorporated under this
act and is a legal entity separate from its partner. 5

1
S.2(20), The Companies Act,2013

2
S.2(62), The Co mpanies Act,2013
3
S.2(68), The Co mpanies Act,2013
4
S.2(71) , The Co mpanies Act,2013

5
S.3(1), Limited Liability Act,2008
 HDFC, MUMBAI

ONE PERSON C OM PAN Y AND PR IVATE COM PAN Y

Members and Directors in an OPC:

The minimum and maximum number of members in an OPC can be only one. An individual
being member of OPC is deemed as First Director of the OPC until the director(s) are duly
appointed by the member. 6 The minimum and maximum number of directors in an OPC can
be one (1) 7 and fifteen (15) respectively. In order to increase the number of directors beyond
15 directors, a special resolution must be passed by the OPC to that effect.

Banking and financial institutions prefer to lend money to the company rather than
proprietary firms. In most of the situations Banks insist the entrepreneurs to convert their firm
into a Private Limited company before sanctioning funds. So it is better to register the start-
up as a One Person private limited rather than proprietary firm. 8 OPCs provide perpetual
succession and limited liability to businesses. They also provide transparency and distinct
identity to the business, which is beneficial from the perspective of fund raising and business
development. 9

PRIVATE LIMITED COMPANY:

In the private limited company, the fund raising is an important issue which is generally dealt
by the board of directors of the company. There are certain types of bank loans:

Short-Term Loans:

Short-term loans are very similar to the regular term loans. However, the difference lies in the
payment tenure. You will have to repay the debt over a shorter period of time when you go
for a short-term loan. Some lenders offer smaller amounts with short-term loans that come
with a tenure ranging between 3 months and 18 months.

6
Section 152(1)
7
S. 149(1)(a)
8
https://taxguru.in/company-law/advantages-disadvantages-person-company.html
9
https://www.livemint.com/money/personal -finance/one-person-company-all-you-need-to-know-
1553596329631.html
 HDFC, MUMBAI

Business Line of Credit:

Both online lenders and traditional banks can offer revolving lines of credit to you that can be
utilised whenever you need financial assistance for your business.

Equipment Financing:

You may use an equipment loan for financing the cost of buying new equipment that will be
required in your business. The equipment will be used as collateral for the loan.

Invoice Financing:

You can avail fast cash from the invoice financing companies based on the outstanding
invoices associated with your business. You can enjoy up to 85% of the outstanding invoice.
In case the invoice remains unpaid, you be charged a factor fee on a weekly basis.

Merchant Cash Advances:

If you wish to avail fast cash that you have repay with a part of the daily credit of your
business and the debit card sales, you should go for merchant cash advances. In case you
have a credit that does not look good, merchant cash advances can prove to be a good option.
However, this particular financing option can turn out to be really expens ive for you.

Business Credit Cards:

This is not a business loan technically. However, business credit cards can be used to finance
the business. Personal finances and business related finances will remain separate when you
use a credit card specifically designed for your business needs. You can also build business
credit by using this card and then earn great rewards and cashback on the purchases that you
make. 10

LOANS TO PRIVATE LIMITED COMPANY:

Finance is the main bloodstream of any business. It is the most important aspect on which the
existence and growth of businesses depend. A public limited company can easily raise
finance by issuing securities to the public without any restriction but for a private company, it
is not easy to raise finance since it is prohibited to make any invitation to public and the
number of its members cannot exceed two hundred. However, the Companies Act, 2013 does
provide for various modes by which a private limited company can raise requisite finance
within the framework of the Act.
10
https://www.bankbazaar.com/home-loan/different-types-of-bank-loans-for-business-in-india.html
 HDFC, MUMBAI

A company can accept unsecured loans from a director and their relatives with or without
interest. For a private company, there is no limit on the amount that can be borrowed by a
company from its directors or their relatives. However, at the time of giving the loan to the
company, the director is required to submit a declaration to the company that the amount of
loan given by him is from his own funds and is not being given out from the funds borrowed
by him by way of loan or deposit from others. The company is required to mention in its
Board’s report the amount of unsecured loan taken from a director and his relatives.

The Promoters of a company can also provide an unsecured loan to the company if it fulfils
three conditions:

 If the loan is brought in due to the condition imposed by a bank or any lending
institution for promoters to bring in funds by way of loan;
 Loan is provided either by promoters themselves or by their relatives or by both;
and
 This loan shall subsist only till there is an outstanding loan from such bank or
lending institution and needs to be repaid after the bank or financial institutional
loan has been repaid. 11

ROLE OF THE BAORD OF DIRECTORS IN FUND RAISING FOR A COMPANY:

The Board of Directors of a company shall be entitled to exercise all such powers, and to do
all such acts and things, as the company is authorised to exercise and do:

Provided that in exercising such power or doing such act or thing, the Board shall be subject
to the provisions contained in that behalf in this Act, or in the memorandum or articles, or in
any regulations not inconsistent therewith and duly made thereunder, including regulations
made by the company in general meeting. Provided further that the Board shall not exercise
any power or do any act or thing which is directed or required, whether under this Act or by
the memorandum or articles of the company or otherwise, to be exercised or done by the
company in general meeting. 12

11
https://blog.ipleaders.in/how-can-a-private-company-raise-finance/
12
Section 179,Companies Act, 2013
 HDFC, MUMBAI

There are several roles of the board of directors in the fundraising for a company. They are
fundraising visionaries, ambassadors, support and donors to the company. 13 For a company to
excise its borrowing powers as per the MOA and AOA, it must be approved by a meeting of
its Board of Directors or a Committee of Directors. Hence, a calling and holding of Meeting
of the Board of Directors must first be completed. In the Board Meeting, the Board may,
delegate the borrowing powers and authority to sign documents pertaining to the loan
application to a committee of directors, the managing director, a manager or any other officer
of the company. On signing of the Board Resolution, the company must file e-Form MGT-
14 to approve the proposed borrowing. Form MGT-14 must be digitally signed by
a Company Secretary or a Director of the Company or CFO or CEO and uploaded to the
MCA, after it is certified by a Company Secretary or Chartered Accountant or Cost
Accountant in practice. 14

If a company is unable to repay a loan, both the directors and shareholders cannot be held
liable. The company is solely liable to repay the loan. This is because a company is a separate
legal entity and is distinct from its shareholders and directors, as has been repeatedly upheld
by the Supreme Court of India. In the eyes of the law, a company registered under the
Companies Act is a legal entity, separate, and distinct from its individual members or those
15
that hold its shares.

OTS POLICY:

OTS is an agreement wherein defaulting borrower agrees to pay part of the dues in order stop
banks from taking legal action against them. Mallya is attempting at something similar with
the banks. OTS is usually done when the borrower cannot repay the loan to the bank and the
interest accrued has surpassed the principle amount. Mostly, OTS happens in case of micro,
small and medium enterprise where the number of defaults may be high. However, OTS can

13
http://www.thefundraisingauthority.com/strategy-and-planning/four-fundraising-roles/
14
https://www.indiafilings.com/learn/obtaining-loan-company/
15
https://www.india-briefing.com/news/liabilities-directors-shareholders-company-defaults-india-
12595.html/
 HDFC, MUMBAI

also be done between a retail client and the bank where the bank might accept a one-time in
order to stop all the recovery proceedings. 16

LIMITED LIABILITY PARTNERSHIP

A partner may lend money to and transact other business with the limited liability partnership
and has the same rights and obligations with respect to the loan or other transactions as a
person who is not a partner. 17 The Central Government may, by notification in the Official
Gazette, direct that any of the provisions of the Companies Act, 1956 (1 of 1956) specified in
the notification— (a) shall apply to any limited liability partnership; or (b) shall apply to any
limited liability partnership with such exception, modification and adaptation, as may be
specified, in the notification. 18 The fund can be raised in an LLP through the debts but not
through equity funding.

When the requirements imposed by clauses (b) and (c) of sub-section (1) of section 11 have
been complied with, the Registrar shall retain the incorporation document and, unless the
requirement imposed by clause (a) of that sub-section has not been complied with, he shall,
within a period of fourteen days— (a) register the incorporation document; and (b) give a
certificate that the limited liability partnership is incorporated by the name specified therein. 19
When the limited liability partnership has been registered, loans are provided by the bank.

16
https://economictimes.indiatimes.com/industry/banking/finance/ots -a-way-out-for-banks-to-recover-loans-
from-defaulters/articleshow/51691182.cms
17
S.66, LLP Act,2008.
18
S.67(1), LLP Act,2008
19
S.12(1),LLP Act,2008
 HDFC, MUMBAI

CHAPTER II : CONSTITUTIONAL DOCUMENT IN A COMPANY

In relation to juristic persons, the constitutional documents (sometimes referred to as

the charter documents) of the entity are the documents which define the existence of the
entity and regulate the structure and control of the entity and its members. It is quite common
for members of a company to supplement the corporate constitution with additional
arrangements, such as shareholders' agreements, whereby they agree to exercise their
membership rights in a certain way. Conceptually a shareholders' agreement fulfills many o f
the same functions as the corporate constitution, but because it is a contract, it will not
normally bind new members of the company unless they accede to it somehow. 20

Companies being artificial persons into existence only for business or non-business purpose
as mentioned in their constitutional documents. Companies do not have an existence beyond
the law; therefore, they are a fiction created by law. They are instrumentalities for carrying
out certain operations. 21

From the Deed of Settlement present in the 1844 Joint Stock Companies Act, the
constitutional document of the company splits into Memorandum of Association and the
Article of Association which was first adopted by the Joint Stock Companies Act, 1856. It
was split into two depending on the importance of the entries; as it was believed that the basic
characteristics of a company had to be distinguished from the operations of the company. The
personality of the comp any is however limited to the purpose for which it has been
envisaged which has to be stated in the Objects clause. Memorandum of Association should
contain the fundamental document of the company and should be unalterable in the interest of
the shareholders, public and especially the creditors of the company while the Articles of
Association should be freely alterable by the shareholders in the general meeting. 22 The
Doctrine of Ultra Vires is a fundamental rule of the Company Law. It states that the objects of a
company, as specified in its Memorandum of Association, can be departed from only to the
extent permitted by the Act. Hence, if the company does an act, or enters into a contract beyond

20
Shalfoon v Cheddar valley(1924) NZLR 561
21
Gagan Infraenergy Ltd. v. DCIT ( 2018) 65 ITR 514 (Delhi)(Trib)

22
http://www.legalserviceindia.com/articles/con_doc.htm
 HDFC, MUMBAI

the powers of the directors and/or the company itself, then the said act/contract is void and not
legally binding on the company.23

MEMORANDUM OF ASSOCIATION

Memorandum of Association (MOA) is a legal docume nt which specifies the scope of

business activities of the company and information about shareholding of the
company. Memorandum is defined under Section 2(56) of the Companies Act,2013. Every
clause of the deal between the parties must be mentioned in the MoA and if it is not
incorporated in it, then it can not be enforced. 24 The tribunal while deciding a case must not
only consider the original MoA but the addendum too. 25 There must not be any ambiguity in
the clauses of MoA and the tribunal is required to make the literal interpretation of the
clauses. 26 In case of conversion from public limited company to private limited company,
there must be a change in the MoA and AoA. 27 A plea has to substantiated with required
evidence regarding the business as per the MoA of the assessee. 28 Memorandum of
Association

Memorandum of Association (MOA) is a legal document which specifies the scope of

business activities of the company and information about shareholding of the company. The
MoA is a document prepared for the Company registration procedure. Sometimes, it is called
the charter of the company other times, it is just called a memorandum. In most countries, the
MOA has to be filed as an ROC Compliance which also includes articles such as MGT-
7 and AOC-4 in India.

Memorandum of Association (MOA) defines the company’s relationship with its

shareholders. It is the most important document of a company as it states the objectives of the
company. It also contains the powers of the company within which it can act.

Use of Memorandum of Association

23
https://www.toppr.com/guides/busi ness-laws/companies-act-2013/doctrine-of-ultra-vires/
24
Co mmissioner of Customs v Atam Manohar Ship Breakers Ltd., Civil Appeal No. 146 of 2004
25
Chaudhary Ship breakers v Co mmissioner of Customs, Ahmedabad, Civ il Appeal No. 1906 o f 2006
26
Hariyana Ship Breakers v Commissioner of Customs, Civil Appeal no. 908 of 2004
27
Alintosch Parmaceuticals Ltd. V N/A, C.P. 1078/2018
28
M/s. Dastur Investments Pvt. Ltd.,Bangalore v DCIT, ITA 1518/BANG/2016
 HDFC, MUMBAI

The Memorandum of Association (MoA) helps establish the extent and scope of the business
activities that a particular company can carry out. The company can perform business
activities which they have specified in the Memorandum of Association (MoA). If you wish
to expand your business activities into other areas of the market, you will have to make
changes to the memorandum accordingly.

A Memorandum of Association (MOA) is a legal document applicable for limited liability

companies. Limited Liability Companies include Private Limited Company (Pvt Ltd)
andLimited Liability Partnership (LLP). MOA is used to define the company’s relationship
with the shareholders. The MOA is a document of public record i.e. anyone who wishes to
see a company’s MoA can do so under the Right to Information (RTI) Act. MoA also
describes the company’s name, the physical address of the registered office, names of
shareholders and the distribution of shares. Somtimes, MoA also contains the exemptions and
tweaks for a particular company. For eg. Private Limited Companies have a lot of exemptions
as compare to other companies. Read: Exemptions Private Limited Company.

The MOA and the Articles of Association (AOA) put together, serve as the constitution of the
company. The MOA is not applied in the U.S. but is a legal requirement for limited liability
companies in European countries including the United Kingdom, France, and the
Netherlands, as well as some Commonwealth nations.

Memorandum of Association Clauses

Memorandum of Association (MOA) includes five different clauses as mentioned below:

 Name Clause
 Domicile Clause
 Objects Clause
 Liability Clause
 Capital Clause
 Subscription Clause

Objects Clause
 HDFC, MUMBAI

Objects Clause constitutes the main body of the memorandum. It provides a list of all the
operations of the company. Every motive and operation the company indulges in must be
mentioned in the object clause. Also, any such operation which is not mentioned in the object
clause is considered to be beyond the reach of the company.
The objects of a company fall into two categories as prescribed below:

1. The proposed objects of the company for which it is being incorporated

2. Matters considered necessary in furtherance thereof

Apart from just stating out the objectives of the company the statement of objects in the
company’s MoA empowers the people associated with the company with the following
benefits

 Gives protection to the subscribers as they have complete knowledge of where t heir
valuable money is being invested.
 Protects the individuals and/ or companies which deal with the concerned company
as they have knowledge of the extent of the companies powers.
 The board of directors of the company is restricted to using the funds of the company
only to the objects specified in the Memorandum.

ARTICLES OF ASSOCIATION

In corporate governance, a company's articles of association (AoA, called articles of

incorporation in some jurisdictions) is a document which, along with the memorandum of
association (in cases where the memorandum exists) form the company's constitution, defines
the responsibilities of the directors, the kind of business to be undertaken, and the means by
which the shareholders exert control over the board of directors. It is defined under Section
2(5) of the Companies Act, 2013. What a company can do has to ascertained in the AoA. 29
AoA is an agreement between the Company and its members but when specifically an article
talks about the parent company and not the subsidiary company in such a situation the

29
World Phone India Ltd. V WPI Group Inc.,USA, CO.A(SB)No. 102 of 2012
 HDFC, MUMBAI

subsidiary company can not be made a party to arbitration proceedings. 30 AoA along with
MoA are the public documents and must be accessed by every interested party. 31

A company may, by a special resolution and after complying with the procedure specified in
this section, alter the provisions of its memorandum. 32 A company may, by a special
resolution, alter its articles. 33 However in some cases even the alteration of MoA and AoA is
not required. Merely increasing the number of directors in a Co. does not required the
alteration of AoA. 34 However, later on it was decided that, the basic require ment of changing
the number of directors in a company is the alteration of AoA by special resolution. 35 In case
of granting loans by the managing agent to managed company does not require a special
resolution or approval from the government. 36

LIMITED LIABILTY PARTNERSHIP AGREEMENT

"Limited liability partnership agreement" means any written agreement between the partners
of the limited liability partnership or between the limited liability partnership and its partners
which determines the mutual rights and duties of the partners and their rights and duties in
relation to that limited liability partnership. 37 Whilst there is no statutory requirement for a
Limited Liability Partnership to have a written agreement, it is recommended that every
practice/firm should be subject to a Limited Liability Partnership Agreement. This agreement
can be used to set out the terms of a Limited Liability Partnership. 38

30
Co x and Kings India Ltd. V Indian railways catering agency, ARB.A.(Co mm.)-13/ 2018
31
ARES Investment LLC v International Print o Pac LTD, ARB.A.(Co mm.) -4/ 2016
32
Section 13, Co mpanies Act,2013
33
Section 14, Co mpanies Act,2013
34
Gur Prasad Kapoor and others v Ramehswar Prasad, appeal no 211 of 1932

35
Navnitlal chabil das v Scindia steam navigation, Original Civil Jurisdiction Suit No. 89 of 2016

36
Cit Bo mbay v central provinces railway co mpany

37
S. 2(o), LLP Act,2008
38
https://simply-docs.co.uk/Partnership-Agreements-and-Joint-Venture/Limited-Liab ility-Partnership-
Agreement
 HDFC, MUMBAI

The trust deed/LLP agreement shall be amended to ensure that it does not contain any
limitation of liability of the trustees/beneficiaries/partners in relation to the provisionsof the
SEBI act and all the regulations therefore. 39 All the matters expressly not mentioned in the
LLP agreement must be decide by the consent of the partners in writing. 40

PARTNERSHIP AGREEMENT

One of the most important of the implied powers of the partners is that he can borrow money
on the credit of the firm. The implied authority may not be by a contract or in writing. It
could be inferred from the surroundings circumstances and held furthe r that in case the
contract work was the principal aim of the firm and its exigencies required the managing
partner should have implied authority to borrow money. 41 The partner who actually borrowed
the money had implied authority to borrow as the firm for which he borrower was a trading
company. 42 managing partner of a trading company has the implied authority to borrow
money for the partnership purposes, and in so doing he can bound the other partners although
he may wrongfully apply it to other purposes other than partnership firm. 43 Whenever a
question arises of the authority of the partner, a test is laid down in the Section 19 of the Act.
There should be evidence as to the nature of the business and the practice of those who carry
it on before, it can be said that the partner had the implied authority to borrow money. 44 If the
partnership is of general commercial purpose, the partner have every authority to do, as he
thinks to be fit for the company. 45 If the defendant is not a partner in a company then he
cannot borrow loans for the partnership firm. 46 In a non trading firm, to borrow loans is not
an implied authority. 47

39
Order in respect of application filed by Gokul MJ
40
R . Abbas v Bharat Digital Vision, O.P. No. 899 of 2017
41
Md. Lutfulla Saheb v Gauhati Bank Ltd. & Others., First appeal no. 18 of 1950
42
Lal Chand v Gopi Chand, 54 CAL WN 167(A)
43
Mg v Toungoo timber co., AIR 1932 Rang 118 C
44
AIR 1932 BOM 539(E)
45
Privy Council of Bank in Australisia v Brilliant.
46
Rajendran & Ors. V Sankar Sundaram, Civil Appeal No. 802 of 2008
47
Jayantilal Rannchodlal v Popatlal Keval das, first appeal 23 of 1932
 HDFC, MUMBAI

Partner's capital is not a loan or borrowing in the hand of a firm. According to the
assessee, Section 40(b)(iv) applies to partner's capital whereas Section 36(1)(iii) applies
to loan/borrowing. 48

Borrowing powers of the Trading Company:

The memorandum may also impliedly confer upon a company the powers and objects to
perform activities incidental to the declared objects. Accordingly, in Rolled Steel Products
(Holdings) Ltd v British Steel Corporation [1986] Ch 246, the Judge stated that:-
“a company has the implied powe rs to do anything reasonably incidental to its declared
objects unless such act is expressly prohibited by the Memorandum. Thus a trading
company must always have implied powe r to borrow money for purposes for its trading
business.”
“Trading company” is a business term and not a legal term. A trading company as opposed to
a non-trading company is an operating company involved in the exchange of goods and
services. From the foregoing court case, the mere fact of a company being conferred with the
power to engage in trade activities infers an incidental power to borrow money for purposes
of undertaking such trade activities.

However, this power can only be implied where there is no express restriction in the
Memorandum of Association against borrowing. Lastly, the implied borrowing power merely
allows a company to borrow money to fund its declared objects and none other.

The memorandum may also impliedly confer upon a company the powers and objects to
perform activities incidental to the declared objects. Accordingly, in Rolled Steel Products
(Holdings) Ltd v British Steel Corporation [1986] Ch 246, the Judge stated that:-
“a company has the implied powers to do anything reasonably incidental to its declared
objects unless such act is expressly prohibited by the Memorandum. Thus a trading company
must always have implied power to borrow money for purposes for its trading business.”
“Trading company” is a business term and not a legal term. A trading company as opposed to
a non-trading company is an operating company involved in the exchange of goods and
services. From the foregoing court case, the mere fact of a company being conferred with the
power to engage in trade activities infers an incidental power to borrow money for purposes

48
Munjal Sales Corporat ion vs Commissioner Of Inco me
 HDFC, MUMBAI

of undertaking such trade activities. However, this power can only be implied where there is
no express restriction in the Memorandum of Association aga inst borrowing. Lastly, the
implied borrowing power merely allows a company to borrow money to fund its declared
objects and none other.

Borrowing Power of Non-Trading Company

For non-trading companies, the English courts have followed the strict rules laid down in the
Ashbury case 49 and have held that non trading companies have no power to borrow unless it
is expressly granted to them by the statute or charter. Though in regard to Patent File
Company50 the Chancery Court allowed a company to deal with its property as it liked, but
the dicta announced in that case was not reconcilable with the principles of law settled in the
Ashbury case (decided five years later).

For non-trading companies, the English courts have followed the strict rules laid down in the
Ashbury case, and Baroness Wenlock v. The River Company, 51 and have held that non-
trading companies have no power to borrow unless it is expressly granted by the statute or
charter. In Reg. v. Sir Charles Reed, 52 Cotton, L.J., said regarding an educational authority :

“It was said that every corporation, unless restricted by its act of incorporation, has the same
power as an individual to enter into contracts, including that of borrowing money,.. . This
contention cannot be maintained. The power of a corporation established for certain
specified purposes must depend on what these purposes are, and except so far as it has
express powers given to it, it will have such powers only as are necessary for the purpose of
enabling it in a reasonable and proper way to discharge the duties or fulfil the purposes for
which it was constituted . A trading corporation stands, as regards an implied power of
borrowing in a very different position. 53

It has been stated by Halsbury :

49
Ashbury Railway Carriage Co. v. Riche, (1875) L. R. 7 H. L. 658.
50
There are some dicta in Patent File Company, (1870) 6 Ch. App. 83, 86, seeming to postulate that a body
corporate as such has an implied power to deal with its property as it thinks fit.
51
(1887) 36 Ch, D. 675, 684.
52
(1880) 5 Q,.B.D. 483.
53
Id. at 488-89.
 HDFC, MUMBAI

“No power of borrowing is implied when the company is not a trading or commercial
undertaking, and in such a case a company can only borrow if authorized to do so by its
memorandum of association.”54

In every case, where the English courts have recognized the implied power in trading
companies, the distinction between trading and non-trading company has been made, and
those courts have not recognized the implied power in the non-trading companies. But, again,
the question regarding the definition of "trading" and "nontrading" company arises and
common law of England as well as the Companies Act of 1956, has not solved the problem. 55
As the Companies Act of 1956 is silent on this point, it is recommended that express
recognition of the power to borrow for all companies, trading and non-trading, be inserted. In
case of non trading companies the borrowing powers must be mentioned in the MoA. If it is
not mentioned in MoA, the only solution here is to alter the objects of MoA as mentioned
under the act. 56 The alteration done in the MoA is not retrospective in nature.

RECOMMENDATION AND CONCLUSION

An insertion be made in the Companies Act of 1956, providing an express recognition of the
power to borrow. For a moment, if we leave this idea of the inclusion of express provision, let
us examine what will happen. As the law declared by the Indian courts is that only trading
corporations have the implied power to borrow. If we take the decisions of the courts as final,
there may not be much need to express provision for trading corporations, because it may be
always presumed they have the power to borrow provided the word "trading company" is
carefully defined. But what will be the law for non-trading corporations ? The act does not
confine itself only to trading corporations; it has been extended also to non-trading
corporations. Necessity for such provision may be eliminated, in the case of trading
corporations by substituting the court's precedents, which may be conclusive on the point; but
the law regarding the other class still remains unsettled. And, it has been made worse by the
confusing definition of trading corporation.

The necessity has been increased since the passing of the 1956 act, as the present Companies
Act of 1956 has wider jurisdiction and scope of application than the Indian Companies Act of
1913. The preamble of the act of 1956, "an Act to consolidate and amend the law relating to

54
6 Halsbury, Laws of England 457-58 (3d ed. 1954).
55
Badger, In re Mansell v. Gobham, (1905) 1 Ch. 56
56
Section 13, Companies act 2013
 HDFC, MUMBAI

companies and certain other associations," differs slightly from that of act of 1913, which
declared that act as "an Act to consolidate and amend the law relating to trading companies
and other associations." The change is clear, the word "trading companies," has been replaced
by the word "companies." The object of the present act appears to be to bring within the
purview of the present act all kinds of companies whether trading or non-trading.

Thus, owing to the following reasons, the necessity for an express provision regarding the
power to borrow in the Companies Act of 1956 has been increased :

(i) English courts as well as Indian courts have required that in the case of non-trading
companies, the borrowing power should be expressly granted by the statute or
charter. But this present act is silent and does not grant the power. As the present act
is also applicable to non-trading companies, a provision regarding power to borrow is
recommended. 57
(ii) Though there is a clear precedent regarding trading companies, it is not clear which
companies are trading and which are nontrading. English courts have not defined
trading companies and law on this point is uncertain and has become a question of
fact.
(iii) The present act is applicable to all types of companies, irrespective of the area of their
operation. They may operate within one city, state (county) or throughout India. The
criterion is that they should be formed under the present act. Since there is no law for
the companies whose objects are confined to one state, the provision is badly needed.
(iv) Further, there has been a material change in the applicatio n and scope of the
Companies Act of 1956, in relation to the act of 1913. Until 1956, the necessity of the
provision for the power to borrow might not have been felt, as the earlier act of 1913
was only applicable to trading companies and for these companies there was a clear
precedent. But, now, besides the trading companies, non-trading companies as well as
other kinds of companies come within the purview of the present act of 1956. For
these companies (trading and non-trading), the authority as to the power to borrow
should be derived from the act of 1956 itself; and, unfortunately, the act does not
mention anything.

57
The reasons for granting the borrowing power to non-trading companies are discussed, supra, pp. 199-200.
The study of the law of the United States reveals that in the United States the courts had recognized the
borrowing power in all types of corporations irrespective of their nature, as they considered this power as very
necessary for carrying out the business. At present, in the United States, the power to borrow is granted by the
statute in almost every jurisdictions to every kind of corporations.
 HDFC, MUMBAI

If one agrees on the insertion of a provision recognizing the power to borrow, one may ask
whether this power should be given to all companies, or only to trading companies, as it was
recognized by the judiciary. If it should be given to all types of companies, it may be asked,
"why? "

On the basis of the study and trend of development in the law in the United States, it is
suggested that all corporations should be given the power to borrow and the only restrictions
be contained in the articles of association. The reason is quite obvious. As observed in the
introduction, the modern trend in financing the corporation is to finance by borrowed funds.
Further, while in the United States, the rule of "special capacities" is strictly applied in
determining the existence of the power, in the case of the borrowing power, the United States
courts had deviated from this principle. Indirectly, they have accepted the contrary principle,
the "general capacities," and, as cited earlier, there were many cases recognizing the implied
power to borrow in the corporations unless expressly prohibited. The question may be asked
why the United States courts have deviated from the strict principle of special capacities,
which meant that the corporation had only those powers which were given to it by the statute
of its creation. The reason is quite evident; as stated by many courts, this is the power that is
very necessary in order to carry out the business. Thus, even where it was not granted by the
statute, the courts of the United States recognized this power for all types of corporations,
irrespective of their nature, whether they were trading, non-trading or any other type of
association. In some cases, they inferred the power to borrow from some other expressly
granted powers. In other words, unless they found such type of statement that "the
corporation is prohibited from borrowing or has no power to borrow," the y recognized the
existence of the power in the corporation, and by recognizing the power, rejected the
principle declared by the case of Commonwealth v. Erie & JV*. E. R. Co., 58 that "If you
assert that a corporation had certain privileges, show us the words of the legislature
conferring them."

Now, in almost every jurisdiction in the United States, the power to borrow has been granted
to the corporation by statute. Further, according to the literal meaning of "trading
corporation," trading corporation is a corporation engaged in buying and selling. Almost
every enterprise organized for carrying out a business has to buy and sell. Under the
Companies Act, 1956, it can be argued that almost all kinds of companies are defined as

58
27 Pa. St. 339, 351, 67 Am. Dec. 471 (1856).
 HDFC, MUMBAI

trading companies. 59 Nor will it be improper if that act is interpreted so that almost all
companies are said to have the implied power to borrow.

At present, India is moving towards industrialization with a view to build up a sound

economical and commercial structure. Until now, there ha ve been very few cases in the field
of company law, and especially on this point. But now, in India, the industries are growing
rapidly; for the small and new enterprises, borrowing is one of the important sources of
capital. As soon as the country becomes more industrialized, the need for such type of
amendment will be felt. The study of the law of the United States shows that before the
recognition of the power by the statutes, there were innumerable cases in the field of
corporation law on this point, regarding the existence of the borrowing power. Almost in
every case, while challenging the borrowing transactions, the defence of ultra vires was
raised. The controversy was solved by inserting an express provision in the Statute of General
Corporation Laws. Drafters of the Model Business Corporation Act also made a similar
provision.

Thus, the trend of corporation law in the United States will very likely develop in Indian
companies laws. Even now, it is visualized, as demonstrated by the fact that in other statutes
which deal with different types of corporations and which were framed after the Indian
Companies Act of 1913 and after the act of 1956, an express provision recognizing the
borrowing power was included. 60

In many countries, e.g., Ghana, New Zealand, Tasmania, and six Australian states, this power
has been granted to the companies by the statute of incorporation. 61 Even, in England, Jenkins
Committee has recommended for such a provision in the Companies Act of 1948. 62

Therefore, it is submitted here that in India also a provision recognizing borrowing power to
the companies should be included in the Companies Act of 1956. If such provision is inserted

59
Companies Act, 1956, § 2(49).
60
Indian Coffee Act, 1942, §33; Coin Industry Act, 1933, §16; Damodar Valley Corporation Act, 1948, §42 ;
Indian Railways Companies Act, 1895, § 7; Road Transport Corporation Act, 1950, §26; Industrial Finance
Corporation Act, 1948, §21; Agricultural Produce (Dev. & Ware Housing) Corporation Act, 1956, §37; Life
Insurance Corporation Act, 1958, § 30.
61
Pennington, Companies in Common Market (1962); N. C. Chatterjee, "Commonwealth Company Law," 6
Company Law Journal 61-89 (1965).
62
Report of the Company Law Committee (Jenkins' Committee Report), Commd. 1749, para. 43. (1962). In
para. 54, the Committee recommended thus : The Companies Act should be amended to provide that every
company should have certain specified power, except to the extent that they are excluded, expr essly or by
implication, by its memorandum, such powers being those which any company would normally need in order
to pursue its objects. See also Minutes of Evidence submitted befor e Jenkins' Committee (1962).
 HDFC, MUMBAI

in the act, it will not be inconsistent with the law enunciated by the judiciary as well as the
legislature. On the other hand, it will be consistent with the principles and rules of
corporation law of the United States, the highly industrialized and economically—as well as
commercially — well established country. Further, the inadequacy which at present exists,
will be removed by such provision. Finally, the aim of the act of 1956, as mentioned in its
preamble — "An Act to amend and consolidate the law relating to the companies and certain
other associations," including non-profit organizations—will be fulfilled.

If the provision granting power to borrow, to trading and nontrading, is inserted in the statute,
the issue whether the particular company has the power to borrow or not will be determined
once for all. The problem regarding the definition of trading compay will also be
automatically solved. Once the capacity problem is solved, the cases where the defence of the
ultra vires may be taken on the ground that the corporation has no power to borrow
(especially in non-trading companies) will be eliminated. Further the borrowing transaction is
a transaction in which the borrower, i.e., the corporation, will always receive money. And so,
even if the corporation's officers borrow beyond their powers, or exercise the power
irregularly, the lenders will always be able to recover their money on the basis of different
equitable and legal principles. In this way, in practice, there will be no case where the lender
has to lose his money, unless he intentionally participates in the wrong. By making such
provision, the law related to the borrowing power and borrowing transaction will almost be
clear and settled.

For the reasons given above, as well as on the basis of the well established principles of the
law in the United States, it is submitted that a provision expressly recognizing the borrowing
power of the companies in India should be included in the Companies Act of 1956.