Considerations for Directors
Within the Companies Act 2006 (CA 2006), there are provisions under which certain transactions or arrangements between a director (or directors) and the company, require the approval of the company’s shareholders. It is common to see directors fail to adhere to the requisite formalities, perhaps due to a lack of awareness of the provisions set out the CA 2006. Often, it is those transactions or arrangements relating to substantial property transactions and the acquisition of non-cash assets by a company from a director (or directors), or by a director (or directors) from a company, where a lack of adherence is displayed.
As per Section 190 of the CA 2006, unless shareholder approval is obtained (by way of an ordinary resolution), a company may not enter into a transaction or arrangement under which:
- (1) a director of the company or of its holding company, or a person connected with such a director, acquires or is to acquire from the company (directly or indirectly) a substantial non-cash asset; or
- (2) the company acquires or is to acquire a substantial non-cash asset (directly or indirectly) from such a director or a person so connected.
Such transactions or arrangements are categorised as Substantial Property Transactions. A ‘non-cash asset’ means any property or interest in property, other than cash.
Where the director in question (or a connected person) is also a director of the company’s holding company, approval from the shareholders of the holding company must also be obtained (also by way of an ordinary resolution). A transaction or arrangement may be entered into prior to receiving shareholder approval, however this may only occur where the transaction or arrangement is conditional on the shareholders’ approval being granted (within a reasonable timeframe).
An asset is deemed to be substantial under the CA 2006, where, at the time the transaction or arrangement is entered into, its value either (1) exceeds £100,000 or (2) exceeds 10% of the company’s asset value and is more than £5,000. In the context of Substantial Property Transactions, a company’s ‘asset value’ at any time is (1) the value of the company’s net assets determined by reference to its most recent statutory accounts, or (2) if no statutory accounts have been prepared, the amount of the company’s called-up share capital.
Whether a person is a ‘connected person’, depends on their relationship with the director of the company. A family member or a connected body corporate are two examples, amongst many.
Where a company enters into a transaction or arrangement which contravenes the CA 2006, the arrangement and any transaction entered into in pursuance of the arrangement is voidable (save for specific exceptions). All directors involved (including those who authorised the transaction), may be personally liable to account to the company for any gain that they have made, as well as indemnify the company for any loss or damage resulting from the transaction.
It is also important to note, the shareholders of the company may ratify a transaction that has contravened the requirements of the CA 2006, provided this is done within a reasonable period.
Please contact our Corporate Commercial team via email: firstname.lastname@example.org or call us at 01256 320555 if you would like to discuss Substantial Property Transactions.