Companies have the right to take loans but they also have some limitations. There are some restrictions on them. These limits and restrictions are determined on the basis of the Companies Act and the cases decided by the Court. These can be explained as follows
(1) Implicit Rights of Business Companies Every business company has an implied right to obtain loans, even if no express rights have been given in its memorandum and articles. Such companies retain the implied right to obtain loans for the fulfillment of their basic and ancillary objectives. If this right of the directors has been prohibited under the Articles or the Memorandum, then the Board of Directors cannot exercise the right to get the loan.
(2) Non-business companies do not have implied right to take loans- Non-business companies are those whose purpose is to work for the development of religion, arts, commerce, science etc. and the profits obtained are to be spent for those purposes. Such companies cannot borrow money unless they are explicitly empowered to borrow money by their memorandum and articles.
(3) Not a loan before getting the right to start business – A public company can get a loan only after getting the certificate of doing business and the private company after getting the certificate of amalgamation. But it can offer shares and debentures together for purchase to the public.
(4) Debt not in excess of capital and funds – A public company cannot borrow more than the sum of its paid-up capital and independent funds without the consent of the general assembly. If the sum of the amount to be borrowed and the amount already taken loan is paid by the company
If it exceeds the sum of capital and free reserves, then it is necessary to take approval from the general meeting of the company for this excess. Without such approval, loan of this excess amount cannot be taken. Also, in this proposal, the amount must be mentioned up to which the Board of Directors can take the loan.
(5) Loans under the Memorandum of Association and the Articles of Association – Although the company has the implied right to take a loan, the company cannot take a loan against the rules of the memorandum and the Articles of Association and such loan will be considered outside its rights.
(6) Temporary loans not included in ‘loans’ – Temporary or short term loans or those payable on demand within a period of several months are not included in loans. Cash, by encashing such bills, can be obtained by opening a credit account. Such loan should be used for working capital only and not for meeting capital expenditure.
(7) Time of exercise of the right of availing loan- A company can exercise the right of availing loan only after it has received the certificate of commencement of business. But a private company can exercise its right to get loan only after obtaining its certificate of amalgamation.
(8) Right to give security or security The company can also mortgage or mortgage its present and future assets to obtain loans. What properties the surety can hold, it is mentioned in the Articles of the Company. taking loans outside rights