Skip to content

ACCA Applied Skills · Corporate and Business Law (Global) · Loan capital

Orlin Ltd's constitution requires board approval, by a majority of directors, for any loan above $1 million. The managing director, Ravi, signs a $3 million loan agreement with Delta Finance without board approval. Delta's officer knew of the requirement but ignored it. Which statement best describes the likely outcome?

The company is likely not bound, because Delta knew the board approval requirement and ignored it, so it did not act in good faith. Third-party protection and apparent authority depend on the lender being unaware of the limitation, and the managing director's title alone does not override it.

  1. AThe company is bound because Ravi is managing director and so always has unlimited authority
  2. BThe company is bound because the Companies law gives conclusive protection to all lenders
  3. CThe company is likely not bound, as Delta did not act in good faith and knew Ravi lacked authorityCorrect
  4. DThe loan is binding on Ravi personally only, and the company is automatically bound as well

Explanation

Protection for third parties depends on good faith and lack of knowledge of the limit. Delta knew of the board approval requirement, so it cannot rely on apparent authority. The company is therefore likely not bound, though it could ratify the loan. Position as managing director alone does not give authority beyond what is given or apparent.

Did you get it right without looking?

One question tells you little. A timed set on Loan capital shows your real accuracy, how long you take and where you lose marks.

Practise Loan capitalFree diagnostic mock

More Loan capital questions