The Directors could only borrow an amount upto $1,000 without the resolution in the General Body Meeting. However, the Directors borrowed excess amount without the resolution of the shareholders in the General Body Meeting. State whether the company is liable for the amounts borrowed by the directors?
The company is liable to the creditors only to the extent of $1,000, as the directors had been authorised to borrow upto this amount, without the resolution in the General Body Meeting. For the amounts borrowed by the directors over and above $1,000, the company is not liable.
The doctrine of indoor management, i.e., since the internal procedure of the company is not open for public, public cannot be expected to be aware of such internal proceedings and therefore, their interest should be protected for all such internal irregularities, provided they are not aware of the internal irregularities.
In the above case, the directors are aware of the limit of power to borrow, i.e. upto $ 1,000 only and since they had the knowledge of irregularity, they are personally liable for amounts over and above $ 1,000.
The same view was held in Howard Vs. Patent Ivory Co.