Borrowing and the Lender

In one line

A lender to a company has to satisfy himself of four things in order, that the company may borrow at all, that the Board may borrow this much, that the person signing may bind the company, and that his security will be registered, and the law gives him a different kind of protection at each stage.

In exam wording: under section 180(5) no debt incurred by the company in excess of the limit imposed by clause (c) of sub-section (1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded.

Why the law has this at all

Every restriction on a company's borrowing is a restriction imposed for somebody's benefit, and the identity of that beneficiary decides how far an outsider is bound by it.

The objects clause protects the members and the creditors against the company's funds being used in a business they never subscribed to. That protection would be worthless if the company could simply agree not to be bound by it, so an act beyond the objects is void, and the counterparty gets nothing on the contract. This is the doctrine in [The Objects Clause and Ultra Vires].

The ceiling in s.180(1)(c) protects the members against the Board gearing the company up without their consent. That is a restriction on the Board, not on the company, and the members can lift it by special resolution at any time. A restriction of that kind can safely be made subject to a good faith exception, and s.180(5) supplies one.

The manner of execution in the articles protects the company against unauthorised signatures. Here the law splits the difference: the outsider is fixed with constructive notice of the articles, because they are public, but is entitled by Turquand's rule to assume that the internal steps those articles require have actually been taken. This is [Constructive Notice and Indoor Management].

Registration of the charge protects everybody else who deals with the company, which is why the sanction in s.77(3) falls on the lender who did not register and not on the company. See [Charges: Creation and Registration].

Set out that way, the whole of a lender's due diligence is a map of Module I, and the four checks below are the practical form of it.

The first question: may the company borrow at all?

Where the power comes from. A trading company has an implied power to borrow for the purposes of its business, and in any event the memorandum under s.4 states the objects and the matters considered necessary in furtherance of them. The question is never whether borrowing is mentioned, but whether this borrowing is for the purposes of those objects.