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ACCA Applied Skills · Corporate and Business Law (Global) · Partnerships

Hana and Ivan trade as a general partnership. Ivan, without authority, borrows 50,000 from a bank in the firm's name for personal use. The loan is outside their agreed limits, but the bank had no reason to doubt his authority and the borrowing is of a kind normal for such firms. Hana refuses to be liable. What is the likely outcome?

The firm may be bound because the bank acted in good faith and Ivan had apparent authority. Internal restrictions do not affect outsiders who do not know of them. Hana can then seek recovery from Ivan for exceeding his agreed authority.

  1. AHana is not liable, because the partnership agreement limited Ivan's authority
  2. BThe bank can recover only from Ivan, because the purpose was personal
  3. CThe loan is void because partners cannot borrow without a written resolution
  4. DThe firm may be bound, because the bank dealt in good faith with a partner acting with apparent authority, and Hana may then seek recovery from IvanCorrect

Explanation

Internal limits on a partner's authority do not bind third parties who are unaware of them and who reasonably treat the act as within the firm's normal business. The firm is therefore bound to the bank, and Hana can claim against Ivan for breach of the agreement. Option A confuses internal limits with external effect.

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