The requirement for directors to declare their interests in any transactions between them and the company is well known.
Having made the declaration, the board can make its decision on whether the company should enter into the transaction, armed with the knowledge that the director is interested in, and may benefit in some way from, the transaction.
However, where the transaction involves the acquisition of any assets by the company from that director, or vice versa, the company may also need to ensure that it has complied with the 'substantial property transaction' procedures set out in the Companies Act 2006 (the Act).
Designed to prevent unscrupulous arrangements between a company and its directors, where shareholders might otherwise be unaware of the effect of the arrangement on the company, the Act provides a mechanism for bringing such transactions, where they involve 'substantial non-cash assets', before the shareholders. Such arrangements may only be effected if the shareholders have passed an ordinary resolution specifically authorising them.
What transactions are caught?
Subject to certain limited exceptions, arrangements between a company and its directors involving the acquisition of assets which have a value, at the time of the arrangement, of:
- more than £5,000 and represent at least 10% of the company's net asset value as shown in its most recent statutory accounts (or, if no accounts have yet been prepared, 10% of its called up share capital), or
- more than £100,000
will require shareholder approval.
Where there are a number of assets involved or where there are a series of transfers of assets as part of the same arrangement, the value will be aggregated in establishing whether these thresholds are exceeded.
The Act does permit entry into the arrangement before shareholder approval is given, but the arrangement must be conditional upon such approval being obtained. Where the transaction is to be made with a director of the company's holding company, approval will be required in the form of an ordinary resolution of both the company and the holding company.
The Act extends the requirements to include the acquisition of assets by or from a person who is 'connected' to a director of the company.
This includes spouses, civil partners, children and step-children of any age (including those of a spouse or partner), parents and companies in which the director has a 20% interest.
What are the sanctions?
Failure to obtain shareholder approval for the substantial property transaction may result in personal liability for the directors and affect the validity of the transaction.
The director, the relevant connected person and any other director who authorised the transaction may be liable to account to the company for any gain he or she has made from the transaction and to indemnify the company in respect of any loss or damage it suffers as a result. As well as breaching the substantial property transaction requirements, the directors may find themselves in breach of their more general duties under the Act.
In addition the transaction itself may be voidable by the company - that is, the company could apply for the transaction to be set aside with the result that money or property may have to be returned. However, it may be possible for the transaction to be affirmed by an ordinary resolution of the shareholders, provided this is done within a reasonable period. Where subsequent affirmation is given, the transaction is no longer voidable.
Transfers of assets between a company and its directors are commonplace and often take place as part of arrangements for setting up a new company, termination of office or pre-sale restructuring. In order to draw a line under the transaction, it is important to consider the value of the all the assets being transferred as part of the arrangement and ensure that shareholder approval is obtained where the substantial property transaction provisions apply.