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

Zephyr Ltd's constitution contains no restriction on borrowing. Its finance director, who has no formal authority to borrow, signs a loan agreement with Marlow Bank for 500,000 on behalf of the company. The board had never approved it, but the bank acted in good faith and knew nothing of the lack of authority. Which statement best describes the company's position?

The company may be bound by the loan because the finance director may have apparent authority. By appointing him to that role, the company may have represented that he could enter such transactions, and a good faith lender can rely on that representation without investigating internal approvals.

1. AThe company is not bound, because only the board can authorise borrowing and the bank should have checked the board minutes
2. BThe company may be bound, because the finance director may have apparent authority arising from the company's conduct in allowing him to hold that positionCorrect
3. CThe company is bound automatically, because every company officer has implied actual authority to borrow
4. DThe loan is void because a company can only borrow if the shareholders pass a resolution approving each loan