The first principle to be borne in mind is that a company cannot borrow unless it is expressly or impliedly authorized to do so by its memorandum of association. In the case of a _trading_ company borrowing is impliedly authorized as a necessary incident of carrying on the company's business. Thus a company established for the conveyance of passengers and luggage by omnibuses, a company formed to buy and run vessels between England and Australia, and a company whose objects included discounting approved commercial bills, have all been held to be trading companies with an incidental power of borrowing as such to a reasonable amount. A building society, on the other hand, has no inherent power of borrowing (though a limited statutory power was conferred on such societies by the Building Societies Act 1874); nor has a society formed not for gain but to promote art, science, religion, charity or any other useful object. Public companies formed to carry out some undertaking of public utility, such as docks, water works, or gas works, and governed by the Companies Clauses Acts, have only limited powers of borrowing.
An implied power of borrowing, even when it attaches, is too inconvenient to be relied on in practice, and an express power is always now inserted in a joint stock company's memorandum of association. This power is in the most general terms. It is left to the articles to define the amount to be borrowed, the nature of the security, and the conditions, if any,--such as the sanction of a general meeting of shareholders,--on which the power is to be exercised. Under the Companies Act 1908, § 87, a company cannot exercise any borrowing power until it has fulfilled the conditions prescribed by the act entitling it to commence business: one of which is that the company must have obtained its "minimum subscription." A person who is proposing to lend money to a company must be careful to acquaint himself with any statutory regulations of this kind, and also to see (1) that the memorandum and articles of association authorize borrowing, and (2) that the borrowing limit is not being exceeded, for if it should turn out that the borrowing was in excess of the company's powers and _ultra vires_, the company cannot be bound, and the borrower's only remedy is against the directors for breach of warranty of authority, or to be surrogated to the rights of any creditors who may have been paid out of the borrowed moneys.
