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CS Executive · Company Law and Practice · Board Composition and Powers of the Board

Ananya Steels Ltd's members passed a special resolution authorising the Board to borrow beyond the aggregate of paid-up capital, free reserves and securities premium, but the resolution did not state any amount. A lender, Bank X, who knew the limit was exceeded, advanced funds. Which is correct?

The resolution is deficient because it must specify the total amount up to which monies may be borrowed. Also, debt exceeding the limit is not valid unless the lender proves good faith and no knowledge of the excess, and Bank X knew, so it is unprotected.

  1. AThe resolution is deficient, as it must specify the total amount up to which monies may be borrowed, and Bank X cannot rely on good faith since it knew of the excessCorrect
  2. BThe resolution is valid, as the Act does not require any amount to be stated
  3. CThe debt is valid because Bank X lent in the ordinary course
  4. DThe debt is valid if the Board later ratifies it

Explanation

A special resolution on borrowing must specify the total amount up to which the Board may borrow. Debt beyond the limit is not valid unless the lender proves it lent in good faith without knowledge of the excess. Bank X knew, so it cannot claim protection. Board ratification does not cure this.

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