ACCA Applied Skills · Corporate and Business Law (Global) · Loan capital
Karan Plc's articles prohibit borrowing above $2 million without a members' ordinary resolution. The board borrows $3 million from Lender Bank. A director of Lender Bank, who knows of the restriction, negotiated the loan and Lender Bank knew approval had not been obtained. What is the likely result?
Lender Bank knew the restriction applied and that approval was missing, so it is not in good faith and cannot rely on third party protection. The company may avoid the excess borrowing. There is no statutory reduction of interest.
- ALender Bank is not acting in good faith, so the company may be able to avoid the excess borrowingCorrect
- BThe loan is fully enforceable, because knowledge of the articles is irrelevant
- CThe loan is enforceable but the interest rate is reduced by law
Explanation
Protection of third parties depends on good faith. Actual knowledge that the directors lack authority and that approval was not obtained shows the lender is not in good faith. The company may therefore avoid the unauthorised excess. Knowledge is relevant, not irrelevant.
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