ACCA Applied Skills · Corporate and Business Law (Global) · Loan capital
Halden Ltd's directors exceeded their borrowing authority, but the shareholders later pass an ordinary resolution approving the loan with full knowledge of the facts. What is the effect of this approval?
The shareholders' informed approval ratifies the directors' unauthorised borrowing, so the company is bound by the loan and the breach in relation to it is cured. It does not make shareholders personally liable, and no court confirmation is required in the ordinary case.
- AIt ratifies the directors' unauthorised act so the company is bound and the directors are relieved of the breach in relation to the loanCorrect
- BIt makes the loan void since shareholders cannot approve borrowing after the event
- CIt has no effect unless the court confirms it
- DIt transfers liability for the loan to the shareholders personally
Explanation
Shareholders may ratify an unauthorised act of directors after the event, provided they are fully informed and the ratification is properly made. The company is then bound by the loan. Shareholders do not become personally liable for company debts in a limited company, so option D is wrong.
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