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

Nolan Ltd's board appoints Mr Pike as a director, but later it is found that Mr Pike was an undischarged bankrupt who was disqualified from acting as a director in the relevant jurisdiction. Mr Pike had signed a supply contract on behalf of Nolan Ltd with Vexa Ltd, which did not know of the disqualification. Which statement is most accurate?

The acts of a person acting as director remain valid for a good-faith third party despite a defective appointment or disqualification, so Nolan Ltd is likely bound to Vexa Ltd. Mr Pike, however, may face personal liability or penalties for acting while disqualified.

  1. AThe contract is void against Vexa Ltd because Mr Pike was never validly appointed
  2. BMr Pike's acts may still bind Nolan Ltd towards a good-faith third party like Vexa Ltd, though Mr Pike may face personal penalties for acting while disqualifiedCorrect
  3. CThe contract binds only Mr Pike and never the company
  4. DVexa Ltd must prove the board knew of the bankruptcy before the contract can be enforced

Explanation

Under the usual rule protecting outsiders, acts of a person acting as director are valid despite a defect in appointment or disqualification, for a third party dealing in good faith. Mr Pike may be personally liable and penalised for acting while disqualified. The contract is therefore not void against Vexa, and Vexa need not prove the board's knowledge.

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