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

Nadia, Omar and Pia are partners. The partnership agreement says no partner may borrow above 10,000 without the consent of all partners. Nadia borrows 50,000 in the firm's name from Quill Bank for a normal business purpose. Quill Bank knew of the restriction. Which statement is correct?

The firm is not bound by the 50,000 loan. Restrictions on a partner's authority in the partnership agreement are effective against third parties who know of them, and Quill Bank did, so Nadia could not bind the firm beyond the agreed limit.

  1. AThe firm is bound, because internal limits never affect third parties
  2. BThe firm is not bound by the loan, because Quill Bank had notice of the limit on Nadia's authorityCorrect
  3. CThe firm is bound for 10,000 only, even if Quill Bank did not know of the limit

Explanation

Internal restrictions bind third parties only if they have notice of them. Quill Bank knew of the limit, so Nadia lacked authority for the 50,000 loan and the firm is not bound. The first option is wrong because the rule protects only third parties without notice.

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