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IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships

A director of Bharat Mutual Ltd exceeds the authority granted by the company's articles when signing a contract with an outsider who acted in good faith and had no reason to doubt his authority. Which principle is most relevant to the company's position?

The company may be bound to a good-faith outsider who had no reason to doubt the director's authority, while the director may be answerable to the company for exceeding his powers. Internal limits on authority do not automatically defeat innocent third parties.

  1. AThe company can always disown the contract because the director exceeded his authority
  2. BThe contract is void because directors cannot bind the company
  3. CThe director alone is bound, whatever the outsider believed
  4. DThe outsider must always prove that the director acted for personal gain
  5. The company may be bound towards the good-faith outsider, while the director may be answerable to the company for exceeding his powersCorrect

Explanation

Outsiders dealing in good faith are protected, so the company can be bound even where the director exceeded internal limits. The director remains accountable internally for breach of duty. The other options deny outsider protection or misplace the burden.

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