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ACCA Applied Skills · Corporate and Business Law (Global) · Company directors

Delmar Ltd's articles require that a director holds 500 qualification shares within two months of appointment. Mr Rao is appointed director but never acquires the shares. Six months later he signs a contract on behalf of Delmar Ltd with Kestrel Ltd, a third party who knew nothing of the shareholding requirement. Which statement is correct?

Mr Rao must leave office for breaching the qualification requirement, but the contract with Kestrel Ltd remains valid. Law protects third parties acting in good faith where a director's appointment or qualification was defective, so Delmar Ltd is bound.

  1. AThe contract is void because Mr Rao was no longer validly a director
  2. BMr Rao must vacate office under the articles, but acts done in good faith while acting as a director remain valid against third partiesCorrect
  3. CThe contract binds Mr Rao personally and not Delmar Ltd

Explanation

Failure to meet a qualification requirement normally leads to vacation of office under the articles, but company law protects outsiders dealing in good faith: acts of a person acting as director are valid despite a defect in appointment or qualification. So Kestrel Ltd can enforce the contract against Delmar Ltd. Option A ignores this protection.

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