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

Gamma Ltd's board, believing it has authority, appoints Mr Diaz as a director, but the appointment breaches a procedural requirement in the articles. Mr Diaz, acting in good faith, signs a supply contract with Delta Co, which knew nothing of the defect. Which statement best reflects the general rule protecting outsiders?

Gamma Ltd is generally bound by the contract. Law protects outsiders acting in good faith, so acts of a person acting as a director remain valid even if a defect in their appointment is discovered later, and Delta Co need not investigate internal procedures.

  1. AGamma Ltd is generally bound, because the defect in Mr Diaz's appointment does not affect an outsider acting in good faithCorrect
  2. BGamma Ltd is never bound, because a defectively appointed director has no authority
  3. CThe contract is void and Delta Co must be treated as a trespasser
  4. DDelta Co is bound but Gamma Ltd is free to cancel

Explanation

Company law generally protects third parties dealing in good faith: acts of a person acting as director are valid despite a later-discovered defect in appointment. This avoids outsiders having to investigate internal procedures. The suggestion that Gamma is never bound ignores that protection.

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