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

The constitution of Marlow Co limits the directors' power to borrow to $5 million without shareholder approval. The directors, without approval, agree a $8 million loan with Brightbank, which acts in good faith and has no knowledge of the limit. Under the usual modern rule protecting third parties dealing with a company in good faith, what is the likely position?

The loan binds the company because Brightbank acted in good faith and can rely on the directors' apparent authority despite the constitutional limit. The directors have breached their duties to the company and may be answerable internally, but the third party's rights are protected.

1. AThe loan is void because the directors exceeded their constitutional limit and the bank is bound by it
2. BThe loan binds the company, as the bank dealing in good faith can rely on the directors' authority, though the directors may be liable to the companyCorrect
3. CThe loan binds the company only up to $5 million
4. DThe loan is valid only if shareholders ratify it within 12 months, otherwise the bank loses its money