JV Limited borrowed a secured loan of 5 crore from Star Bank Limited (the bank) to meet its working capital requirement. However, the borrowing powers of the company, under its Memorandum of Association, were restricted to 1 crore. The bank released the loan amount in two instalments of 1 crore and 4 crore. On the due date for repayment of the loan, the company refused to accept the liability of 5 crore on the ground that the borrowing was ultra vires the company. The company's books of account show that the company has utilised the loan amount of 3 crore for repayment of its lawful debts. The utilisation of the remaining 2 crore cannot be traced. Referring to the doctrine of ultra-vires under the Companies Act, 2013, examine the validity of the decision of the company denying the repayment of the loan and explore the remedy, if any, available to the bank for recovery of the loan.\nOR\nThe Object clause of Memorandum of Association of ABC Pvt. Ltd. authorized the company to carry on the business of trading in property in Gurgaon. Since the company was not doing well, the Directors of the company in a recent board meeting planned to diversify the business and enter into Construction business. For this purpose, they borrowed a sum of ` 5 crores from Magnum Finance Ltd. But the members of the company did not approve the decision of the board hence, company refused to repay the loan. According to provisions of the Companies Act, 2013 what is the recourse available to Magnum Finance Ltd. for recovery of the loan?

Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond (their) powers”. It is a fundamental rule of Company Law that any act done or a contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void and inoperative in law and is therefore not binding on the company. \nThe impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction, nor can it sue on it. Since the memorandum is a “public document”, it is open to public inspection. Therefore, when one deals with a company one is deemed to know about the powers of the company. If in spite of this you enter into a transaction which is ultra vires the company, you cannot enforce it against the company. \nIn the instant case, borrowing more than ₹1 crore was clearly beyond JV Limited’s powers as per its MoA, making the loan transaction ultra vires to the extent of the excess amount over ₹1 crore. \nHence, the decision of the company denying the repayment of the loan being ultra virus the company shall be valid for ` 4 crore. \nIf the funds have been applied for legitimate business purposes (such as repaying lawful debts), the lender steps into the shoes of the debtor paid off and consequently he would be entitled to recover his loan to that extent from the company. \nTherefore, JV Limited cannot deny repayment of ₹3 crore, as it was utilised for lawful purposes, despite the ultra vires nature of the loan. \nUltimately, the company has no remedy available to recover the balance amount of loan of ` 1 crore as the spending thereof is not traceable.\nOR\nIn the instant case, ABC Pvt. Ltd. was authorised to trade in property only, so taking loan for construction business was ultra virus the power of the company. Therefore, Magnum Finance Ltd. cannot enforce against ABC Pvt. Ltd. for recovery of the loan. But,\na) It can recover the money to the extent it has been utilised in meeting lawful debt of the company, then it steps into shoes of the debtor paid off and consequently it would be entitled to recover the loan to that extent from the company. \nb) if the money is not spent, it may stop ABC Pvt. Ltd. from spending by means of injunction and recover the unspent amount.