AK Private Limited has borrowed 36 crore from BK Finance Limited. However, as per memorandum of AK Private Limited, the maximum borrowing power of…

This case is governed by the ‘Doctrine of Ultra Vires’. According to this doctrine, any act done, or a contract made by the company which travels beyond the powers of the company conferred upon it by its Memorandum of Association is wholly void and inoperative in law and is therefore not binding on the company. This is because the Memorandum of Association of the company is, in fact, its charter; it defines its constitution and the scope of the powers of the company. Hence, a company cannot depart from the provisions contained in the memorandum however imperative may be the necessity for the departure. Hence, any agreement ultra vires the company shall be null and void. (i) Whether AK Private Limited is liable to pay the debt? As per the facts given, AK Private Limited borrowed 36crore from BK Finance Limited which is beyond its borrowing power of 30crore. Hence, contract for borrowing of 36crore, being ultra vires the Memorandum of Association and thereby is void. AK Private Limited is not, therefore, liable to pay the debt. (ii) Remedy available to BK Finance Limited: In light of the legal position explained above, BK Finance Limited cannot enforce the said transaction and thus has no remedy against the company for recovery of the money lent. BK Finance Limited may take action against the directors of AK Private Limited as it is the personal liability of its directors to restore the borrowed funds. Besides, BK Finance Limited may take recourse to the remedy by means of ‘Injunction’, if feasible.