CORPORATE BORROWING, LENDING
& INVESTMENT
MODULE 3
IN KRISHNAN KUMAR ROHATGI AND OTHERS V.
STATE BANK OF INDIA AND OTHERS,(1980)
• FACTS
• THE COMPANY BORROWED RS. 5 LAKHS FROM THE BANK UNDER A
PROMISSORY NOTE.
• ROHATGI (A DIRECTOR) PERSONALLY GUARANTEED REPAYMENT AT EACH
RENEWAL. THE FINAL GUARANTEE (1959) WAS FOR RS. 1,62,000.
• THE COMPANY FAILED TO REPAY. BY 1962 (DATE OF SUIT), OUTSTANDING
AMOUNT INCLUDING INTEREST WAS RS. 1,82,728.99
DEFENCES RAISED
• COMPANY: NO BOARD RESOLUTION FOR THE 1959 LOAN — SO THE COMPANY SHOULD NOT BE
BOUND.
• HEIRS: ROHATGI'S GUARANTEE WAS PERSONAL AND SHOULD NOT BIND HIS ESTATE AFTER DEATH.
• BOTH: CHALLENGED WHETHER THERE WAS VALID CONSIDERATION AND PROPER PRESENTMENT OF
THE PROMISSORY NOTE.
ISSUES
CAN A COMPANY ESCAPE REPAYING A LOAN SIMPLY BECAUSE ITS OFFICER LACKED A FORMAL BOARD
RESOLUTION TO BORROW?
What Was Held The Judgment
1. Company IS Liable — Benefit Equals Bound
Even without a board resolution, the Court held the Company was bound. The Company
received and used the money — it cannot benefit from a loan and then deny its officer had Acceptance of benefit =
bound by the act
authority to take it.
2. Heirs are Partly Liable — Guarantee Survived Death
The guarantee expressly covered executors and successors. Rohatgi's estate was liable for Rs.
A guarantee can bind the
1,62,000 + interest from date of suit — but only from property that devolved to heirs after his guarantor's estate if
death. clearly worded
3. Valid Consideration — The Loan Itself Was Enough
The Bank's disbursement of money and continued credit constituted valid consideration for the promissory Lending money = valid
consideration (Contract
note and the guarantee. Forbearance (not calling in a debt) also counts as consideration. Act s.2(d))
Why This Case Matters
Borrowing Power of Companies Debt vs. Equity Distinction
Shows that a company's borrowing power is real and The promissory note here is classic DEBT — fixed repayment,
enforceable — even if internal procedures (like board interest, no profit-sharing. The Bank had no control over the
resolutions) are imperfect, outsiders who lend in good faith business. This perfectly illustrates the debt side of the debt–
are protected. equity border.
→ Slides 9 & 2–5 → Slides 2–5
Lender Protection Mechanisms Control Risk & Lender Liability
The guarantee is a key lender protection tool. This case shows The Bank never took control of the Company's operations —
guarantees can survive the guarantor's death IF properly it used a guarantee instead. This is exactly the boundary from
drafted — a critical lesson for any corporate lender Slide 6: lenders protect themselves through covenants and
structuring a loan. guarantees, NOT by seizing control.
→ Slide 11 (Practical Guidelines) → Slide 6 (Control Risk)
DEBENTURES
SECTION 44 – NATURE OF SHARES OR DEBENTURE
THE SHARES OR DEBENTURES OR OTHER INTEREST OF
ANY MEMBER IN A COMPANY SHALL BE MOVABLE PROPERTY
TRANSFERABLE IN THE MANNER PROVIDED BY
THE ARTICLES OF THE COMPANY.
SECTION 71-
(1) A company may issue debentures with an option to convert such debentures into shares, either wholly or
partly at the time of redemption:
Provided that the issue of debentures with an option to convert such debentures into shares, wholly or
partly, shall be approved by a special resolution passed at a general meeting.
(2) No company shall issue any debentures carrying any voting rights.
(3) Secured debentures may be issued by a company subject to such terms and conditions as may be
prescribed.
(4) Where debentures are issued by a company under this section, the company shall create
a debenture redemption reserve account out of the profits of the company available for payment
of dividend and the amount credited to such account shall not be utilised by the company except for the
redemption of debentures.
(5) No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding
five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed
one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as
may be prescribed.
(6) A debenture trustee shall take steps to protect the interests of the debenture-holders and redress their
grievances in accordance with such rules as may be prescribed.
(7) Any provision contained in a trust deed for securing the issue of debentures, or in any contract with
the debenture-holders secured by a trust deed, shall be void in so far as it would have the effect of exempting a
trustee thereof from, or indemnifying him against, any liability for breach of trust, where he fails to show the
degree of care and due diligence required of him as a trustee, having regard to the provisions of the trust deed
conferring on him any power, authority or discretion:
Provided that the liability of the debenture trustee shall be subject to such exemptions as may be agreed upon by
a majority of debenture-holders holding not less than three-fourths in value of the total debentures at a meeting
held for the purpose.
(8) A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their
issue.