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

Karim is appointed a director of Solano Plc. Unknown to the board, Karim is an undischarged bankrupt and the law of the jurisdiction prohibits such persons from acting as directors without court permission. Karim attends board meetings and signs a supply contract on the company's behalf with Orrin Ltd, which had no knowledge of the bar. What is the most likely position?

Karim commits an offence by acting while barred, but the contract is likely binding on Solano Plc. The law protects outsiders dealing in good faith, so defects in a director's appointment or qualification do not invalidate the director's acts as regards third parties.

  1. AThe contract with Orrin Ltd is automatically void because Karim's appointment was defective
  2. BKarim commits an offence by acting, but the company is likely bound to Orrin Ltd because the acts of a director are valid despite a defect in appointment or qualificationCorrect
  3. COrrin Ltd must prove that all other directors approved Karim's appointment before the contract binds Solano Plc

Explanation

Company law generally protects third parties by validating acts of a director despite defects in appointment or disqualification. Karim may be liable for acting while disqualified. The contract is therefore not automatically void, and Orrin need not prove board approval.

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