FLK1 · Multiple-choice practice

FLK1 Business Law — Question 22

Question

ABC Ltd is a private limited company with multiple directors. The company’s articles of association grant the directors the power to make decisions collectively as a board. However, one of the directors, Alex, starts making major decisions for the company without consulting the other directors. Which of the following statements best describes the situation?

Alex is allowed to make major decisions on behalf of the company as long as they are in the best interest of the company.
Alex’s actions are valid because the articles of association grant individual directors the authority to make decisions.
Alex’s actions are valid if he informs the other directors of their decisions after they have been made.
Alex’s actions are invalid as regard outsiders because the articles of association require major decisions to be made collectively by the board.
Alex’s actions are valid as regard outsiders regardless of limitations in the articles of association.

Answer and explanation

Correct answer: E. Alex’s actions are valid as regard outsiders regardless of limitations in the articles of association.

In a private limited company, the board of directors generally exercises its powers collectively as stated in the articles of association. Major decisions impacting the company’s affairs and operations should be made collectively by the board. Alex’s actions of making major decisions without consulting the other directors go against the collective decision-making process established in the company’s articles of association. However, s.40 Companies Act 2006 determines that external parties are not affected by internal limitations of capacity. Therefore, an act of a director violating the articles will be invalid as regards the corporation, but can still have binding consequences for the company and third parties.

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