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ACCA Applied Skills · Corporate and Business Law (Global) · Other company officers

Delmar Ltd's articles state that the company secretary has no authority to borrow money. The secretary, Mr Chen, nevertheless signed a loan agreement with a bank that had never seen the articles and never dealt with Delmar before. The board did not know of the loan. Which is the most likely outcome?

Delmar is probably not bound. Borrowing lies outside a secretary's normal administrative authority, and nothing the board did represented that Mr Chen could borrow. Ostensible authority needs a representation by the company, so the bank's ignorance of the articles does not make the loan enforceable against Delmar.

  1. ADelmar is bound, because the bank had no knowledge of the articles and secretaries always have authority to borrow
  2. BDelmar is not bound by the loan through ostensible authority, because borrowing is outside a secretary's usual administrative authority and the board made no representation that he could borrowCorrect
  3. CDelmar is bound because the articles are irrelevant to third parties
  4. DDelmar is bound only for half the loan amount

Explanation

Ostensible authority requires a representation by the company (usually the board) that the agent has authority. Merely holding the office of secretary only implies administrative authority, and borrowing falls outside it. The board made no representation, and the bank cannot rely on the secretary's own statement. The bank's ignorance of the articles does not create authority.

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