What is a substantial property transaction?
Section 190 CA 2006 controls any arrangement whereby:
- a director or connected person acquires a non-cash asset from a company, or
- a company acquires a non-cash asset from a director or connected person.
If the non-cash asset is a substantial non-cash asset, then the arrangement must either be approved by an ordinary resolution of the company or be conditional on such approval being obtained. Where an arrangement is conditional on approval being given, the company must not be subject to any liability for failure to obtain the approval (s.190(3)).
Anything to which a director is entitled under his service contract is excluded from being a substantial property transaction (s.190(6)).
Who is a connected person?
Under s.252 a connected person is (broadly speaking):
- a member of the director’s family (being a spouse, partner, civil partner, child or step child or a parent of the director, as specified in s.253(2));
- a company with which the director is associated (a company in which the director and persons connected with him together own at least 20% of the share capital);
- a trustee of a trust in which the director or a person connected to a director have an interest; or
- a person acting in the capacity of a partner of the director, or of a person connected to a director.
What is a non-cash asset?
Section 1163 defines a non-cash asset as ‘any property or interest in property other than cash’.
What is a ‘substantial’ non-cash asset?
This is explained in s.191.
- An asset worth £5,000 or less is not a substantial asset.
- An asset worth more than £100,000 is a substantial asset.
- An asset worth more than £5,000, but not more than £100,000 is a substantial asset only if it is worth more than 10% of the company’s net asset value. A company’s net asset value is that shown in its most recent statutory accounts.
If the company is only recently incorporated and no accounts have yet been prepared, then the net asset value is taken to be the amount of the company’s called up share capital.
What happens if the directors do not obtain shareholder approval?
The transaction is voidable by the company (s.195) unless:
- restitution is no longer possible;
- the company has been indemnified by another person for the loss or damage suffered by it; or
- bona fide rights have been acquired by a third party who was not a party to the transaction and such rights would be affected by the avoidance of the transaction.
Section 196 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period. If it is affirmed, the arrangement may no longer be avoided under s.195.
And
Irrespective of whether the transaction has been avoided, the director (and the person connected to the director, if relevant) and any other director who authorised the arrangement are liable to account to the company for any gain made directly or indirectly out of the transaction, and to indemnify the company for any loss or damage resulting from the transaction (ss.195(3) and 195(4)).
Is there any defence/exemption?
If the transaction is between a company and a person connected with a director, and the director concerned shows that he took all reasonable steps to ensure the company’s compliance with s.190, the director will not be liable under s.195(6).
There is also a defence under s.195(7) for any connected person (if relevant) and any director who authorised the transaction who can show they had no knowledge of the circumstances constituting the contravention.
Wholly owned subsidiaries: Under s.190(4)(b), approval is not required by the members of any company which is a wholly-owned subsidiary of another company.