Inter-Corporate Loans: Legal Framework and Key Considerations

Introduction to Borrowing in Company law

Borrowing can be termed as another source of having money. If the memorandum of any company does not prescribes it cannot borrow money.

Section 179 of the Companies Act,2013 states that the director can ask for borrowing. the directors in the board of meeting have to pass the resolution for the borrowing of money.

The power to borrow can be only done by passing a resolution.

Unauthorized borrowing

Borrowings without the authority and which are against prescribed amount of the article of association are unauthorized borrowing.

Consequence of the unauthorized borrowings:

1. If the authority has not prescribed for borrow from somewhere and then also if the company borrows then it will be ultra vires and will be void. There exists no loan or borrowing.
2. If the lender lends money and that has not been spent in the specified area then such lender can ask for an injunction to not spend that money.
3. If the lender is able to identify that their loan has been kept as it is and is easily identifiable then he Can claim the loan back.

Types of borrowing

The types of borrowing in company law are the following :

1. Long term borrowings: have been borrowed for five years or more.
2. Short term borrowings: have been borrowed for a period of one year only.
3. Medium term borrowing: have been borrowed for a period of two to five years.
4. Secured borrowing: if the creditor has recourse to the assets of the company, then the company obligation is considered as a security. From a freely tradable company.
5. Unsecured borrowing: debt is financial obligation here.
6. Syndicate borrowings: borrowers are being given large amount by a group of leaders.
7. Bilateral Borrowing: the borrower borrows money from a particular institution or a particular company.
8. Private borrowing: the borrower borrows money from the bank or a private institution.
9. Public company: the borrower borrows money.

Registration of mortgages and charges

The power to mortgage assets of the company and take charge on them comes under the borrowing process only. This gives security to the lenders.

Charges id defined as under 2(16) as an interest on the company on its property or assets if kept as a security for the purpose of borrowing.

Registration of charges

Section 77(1), Section 78 and Section 79 of the Companies Act, 2013 provides for the registration of the charges.

The application should be submitted to the registrar. Under this a company should register the charge with the particulars of the document, instrument within the thirty days of the charge of the creation of charges.

Charges Requiring Registration

1. Charge created as the security to the debenture.
2. Charge on uncalled share capital.
3. Charge on any immovable property.
4. Charge on movable property but it should not be pledge.
5. Charge on a share of the ship.

Extension of Time for Registration:

Section 77(1) with the extension for the registration of charge. The registration should be done within 300 days from the date of the application. In case it is not made within 300 days the company can for ask for the extension of registration of charge under section 87 of the act.

Effects of Non-Registration of Charge

In case a charge is not registered then the creditor cannot take account of it. however, the company will still be liable to repay the amount.