NSW Company Constitution - Restriction on Loan Contracts?

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gh590

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21 September 2014
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If a company has a constitution that states they can only borrow a certain amount of money at one time and one of the directors from the company signed a loan agreement that was more then what the constitution states is allowed, is that contract still legally binding under commercial law or can the company pull out of the loan?
 

Tim W

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Sarah J

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16 July 2014
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Is the loan to a third party or a company director? If it is to a third party, the law will generally validate this loan as against third parties who did not have notice of the irregularity in the passing of the loan. Third parties are allowed to presume that a director acts in accordance with the company rules and constitution and there are no irregularities in the decision. However, the director may be liable against the company for this decision. The company cannot pull out of the loan but may seek indemnification against the director.

If the loan is made to a director, then yes, loan can be invalidated and company can pull out of loan. Director may have also breached directors' duties.
 

gh590

Member
21 September 2014
2
0
1
Is the loan to a third party or a company director? If it is to a third party, the law will generally validate this loan as against third parties who did not have notice of the irregularity in the passing of the loan. Third parties are allowed to presume that a director acts in accordance with the company rules and constitution and there are no irregularities in the decision. However, the director may be liable against the company for this decision. The company cannot pull out of the loan but may seek indemnification against the director.

If the loan is made to a director, then yes, loan can be invalidated and company can pull out of loan. Director may have also breached directors' duties.
The loan is to the company signed by two of the directors and approved by the board.
 

Sarah J

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16 July 2014
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Oh sorry, misread your original question.

Nevertheless, my original response still apply. The company will need to continue with the loan agreement as against the third party. However, the company can seek compensation against the directors who made the loan as this is a breach of director powers.