It appears to be settled that money borrowed ultra vires is not recoverable at law by the lender,4 unless it remains unused in the hands of the corporation.5 In equity, however, it is held that money so borrowed must be refunded to the extent that it has been used in the discharge of legitimate debts of the corporation.1 This rule was based originally upon the doctrine of subrogation and seems to have been suggested by the analogy to cases of money borrowed by infants or married women and expended for necessaries,2 but in the later cases it is said to rest upon the theory that if money borrowed is so expended as not to increase the liabilities of the corporation there is in substance no borrowing at all and the transaction should not be regarded, in equity, as ultra vires:
1 Machen, "Corporations," Sec. 1028.
2 East Anglian R. Co. v. Eastern Counties R. Co., 1851, 11 C. B. 775.
3 Great North-West, etc., R. Co. v. Charlebois, [18991 A. C. 114.
4 See Chambers v. R. Co., 1864, 5 Barn. & Cress. 588; In re National, etc., Building Society, 1869, L. R. 5 Ch. 309; In re Victoria, etc., Society, 1870, L. R. 9 Eq. 605.
5 See In re Wrexham, etc., R. Co.,  1 Ch. 440, 457.
Blackburn Building Society v. Cunliffe, 1882, 22 Ch. Div. 61: Lord Selborne, L.J. (p. 71): "The test is: has the transaction really added to the liabilities of the company? If the argument of the company's liabilities remains in substance unchanged, but there is, merely for the convenience of payment, a change of the creditor, there is no substantial borrowing in the result, so far as related to the position of the company."
The soundness of this reasoning may be questioned. Where a corporation is given power to borrow, but is forbidden to borrow after a prescribed limit of indebtedness is reached, it is clear enough that the purpose of the prohibition is merely to keep the corporation within the limit fixed, and therefore that money borrowed after the limit is eached but immediately applied in payment of a preexisting debt is in reality not borrowed ultra vires? But where a corporation is given no power whatever to borrow it is going rather far to conclude that money borrowed and applied in discharge of debts arising either before or after such borrowing, is in substance not borrowed at all.4 It would be simpler and more equitable, it is submitted, to allow a recovery in quasi contract whenever it appears that the money loaned to a corporation was loaned in reliance upon the validity of the company's contract and either remains in the company's hands or has been used in the legitimate business of the company, whether in the payment of debts, the purchase of property, or otherwise. The language of the courts, in a few instances, seems broad enough to support such a rule:
1 Troup's Case, 1860, 29 Beav. 353; In re Cork, etc., R. Co., 1869, L. R. 4 Ch. 748; Blackburn Building Society v. Cunliffe, 1882, 22 Ch. Div. 61; Baroness Wenlock v. River Dee Co., 1887, 19 Q. B. D. 155.
2 See In re National, etc., Building Society, 1869, L. R. 5 Ch. 309; Baroness Wenlock v. River Dee Co., 1887, 19 Q. B. D. 155, 165.
3 See In re Wrexham, etc., R. Co.,  1 Ch. 440, 457.
4 In Baroness Wenlock v. River Dee Co., 1887, 19 Q. B. D. 155, it was held to be immaterial whether the money was applied in discharge of debts arising before or after the borrowing.
Troup's Case, 1860, 29 Beav. 353: A claim by the secretary of an electrical telegraph company against the company, under a winding-up order, for money borrowed by him for the company and applied for its benefit. The claim was opposed on the ground that the company had no power to borrow money.1 It appeared that the money had been applied, in the main, to the satisfaction of a debt due from a contractor to a bank, against which debt the directors of the company had agreed to indemnify the contractor in part payment for certain works and materials prepared by the contractor for the construction of the company's telegraph line. The Master of the Rolls [Sir John Romilly] (p. 356): "The company thereby obtained the stock and materials in this manner and have sold them for about the price they gave for them (the price, however, is immaterial), and the proceeds of this sale have been divided among the shareholders, or if not so divided, have gone in diminution of the calls upon the shareholders by being applied in making good the claims upon the company. . . . The principle is this: - that where the Directors of a company have no power to borrow money, the repayment of money borrowed cannot be enforced by the lender against the company; yet, if the money has been bona fide applied to the purposes of the company, the bona fide lender is entitled to payment as against the company."
But, on the other hand, it has been explicitly held that where money is borrowed ultra vires by a benefit building society and advanced to its members upon mortgage security (such loans to members being intra vires), the society is not obliged, even in equity, to make restitution to the lender.1 And in other cases there are strong dicta to the same effect.2
1 In this case, as in some others cited in this section, it is not entirely clear whether the contract was beyond the powers of the corporation or merely beyond the powers of the directors.
The reason usually given for denying a recovery where the money borrowed is expended in the legitimate business of the corporation, but not in the payment of its debts, is that to permit a recovery would be in effect to enforce the ultra vires contract of loan:
In re Wrexham, etc., R. Co.,  1 Ch. 440: Vaughan Williams, L.J. (p. 457): "But, if the company, instead of either refraining from adopting the loan, or applying it in such a manner as that their total indebtedness shall remain unchanged, apply it, say, to the purchase of new property, the company cannot, after so doing, be sued in any form for a return of the money, since the money had been dealt with under the contract of loan, and to allow the company to repay it would simply be to allow them to carry through an ultra vires transaction."
In reply to this argument it might be urged that to allow money loaned upon an ultra vires contract to be recovered before the maturity of the loan is quite different from allowing the parties "to carry through an ultra vires transaction." But granting the cogency of the argument, what actual harm would result if the lender were allowed a quasi contractual recovery ? At the worst, such a rule might offer some encouragement to the making of ultra vires contracts of loan. On the other hand, and of vastly greater importance, it would afford adequate protection to the innocent lender - protection entirely consistent, moreover, with the English theory of corporate capacity.