Companies’ Power to Borrow at Common Law and Under Section 191 of the Nigerian Companies Act 2020: Identifying the Red Line

doi:10.7176/jlpg/116-04

Abstract

In contemporary times, the necessity of adequate capital and its relative scarcity invariably impel companies to source for funds through borrowing. At common law, the power of the company to borrow is implied, and it must be exercised in strict compliance with its business and in furtherance of such business as clearly stated in its memorandum of association, otherwise the power would be ultra vires , void and of no legal effect. Section 191 of the latest Nigerian Companies and Allied Matters Act 2020 (Companies Act) expressly provides for the power of the company to borrow money, mortgage or charge its property and issue securities for the purpose of its business. The company may borrow any amount of money and expend it on any business that is not even stated in its memorandum. The germane issue which this article examines is the nature and extent of companies’ powers to borrow at common law and under the provision of section 191 of the Companies Act. Quite unlike the common law position, this article finds that under the Companies Act ultra vires borrowing by the company is not void or invalid. But the implication of this finding does not imply that the company’s express power to borrow is absolute, inviolable, and free of legal guard rails. Significantly, this article identifies the line in the Companies Act beyond which the provision of section 191 of the Companies Act is breached, including the consequences and the remedies that flow from such breach. Keywords: Nigerian Companies Act, section 191, companies’ borrowing, Companies’ securities, ultra vires doctrine, loan contract DOI: 10.7176/JLPG/116-04 Publication date: December 31 st 2021

Highlights

Companies are registered or incorporated with the object of carrying on business ventures for the main purpose of making profits for distribution to members and shareholders[1]
Determining the borrowing power of a company has become more instructive in light of many cases in Nigeria where companies take loans from financial institutions without paying back as and when due, while in some cases the loans are declared as bad debts
The statutory remedies for any loss or fear of loss as a result of such flexible and unilateral business decisions of the company are able to remove any disincentives to lenders and secured creditors of the company

Summary

Introduction

Companies are registered or incorporated with the object of carrying on business ventures for the main purpose of making profits for distribution to members and shareholders[1]. 1. Introduction Companies are registered or incorporated with the object of carrying on business ventures for the main purpose of making profits for distribution to members and shareholders[1]. Prior to incorporation and commencement of business, the promoters of a company strive to raise adequate capital for the company’s business undertaking through such means as offering shares subscription, or concluding loan or joint venture agreements.

Results

Conclusion