Property transactions with
directors.
This is
the second in my short series of notes on non-property legal points relevant to
property lawyers and others in the property industry. It focuses on sales or
leasing of property between directors and their companies.
Shareholders’
approval is needed for property transactions involving company directors, under
section
190 Companies Act 2006. The case law (re Duckwari plc (No 2) and Demite v Protec Health highlights
the importance of this section, and the immense potential difficulties if it is
not complied with. Property professionals should always be alert to section 190
problems when dealing with transactions involving directors and their
companies.
Section
190 applies to an arrangement whereby:
·
a director or other relevant person acquires a
substantial non-cash asset from the company or
·
the company acquires a substantial non-cash
asset from a director or other relevant person.
The grant
of a lease involves the acquisition of an asset, so it is included if the value
of the leasehold interest is sufficient.
The value
of the asset must be at least £5,000 and exceed 10% of the company’s asset
value or, if less, £100,000. Multiple assets in the same arrangement, or a
series of arrangements, are aggregated. So, for example, shareholder approval
is needed where shown by a tick in the table:
Value of
transferred asset(s)
|
|
Company Asset Value
|
|
(£100,000)
or £10,000
|
£100,000
|
£2m
|
£1,500
|
●
|
●
|
●
|
£7,500
|
ü
|
●
|
●
|
£15,000
|
ü
|
ü
|
●
|
£150,000
|
ü
|
ü
|
ü
|
A company's “asset value” is the value of the company's
net assets according to its most recent statutory accounts, or if no statutory
accounts have been prepared, the amount of the company's called-up share
capital.
The
section applies if the person acquiring or transferring the asset is:
·
a director of the company transferring or
acquiring the asset
·
a director of its holding company
·
a person connected with a director of the
company or of its holding company.
If the director or connected person is a director of the
company's holding company or a person connected with a director, the
arrangement must also be approved by a resolution of the shareholders of the
holding company, or be conditional upon approval. Connected
persons include spouse, minor or adult children, associated companies and
trusts.
The
acquisition can be direct or indirect, eg via a third party, if it forms part
of one arrangement.
If the
section applies, the arrangement may not be implemented unless it is first
approved by a resolution of shareholders of the company and, where applicable,
its holding company. The approval can be given before the arrangement is
entered into, or the arrangement can be made conditional upon approval. An
ordinary resolution is sufficient, and it does not have to be filed at
Companies House.
This
section does not require approval:
· by shareholders of a company which is a
wholly-owned subsidiary (but it may still require approval by shareholders of a
holding company)
·
of transfers of assets within a group of
companies (so long as all relevant companies are wholly-owned group members)
·
of arrangements by companies in insolvent
liquidation or administration
·
by shareholders of a holding company in
insolvent liquidation or administration
·
by shareholders of a holding company which is
not a UK company
·
of transactions with members as such (eg
dividends in specie)
·
of transactions on a recognised stock exchange
through an independent broker.
The
section does apply to sales of assets by liquidators of companies in members’
voluntary (solvent) liquidation, and by receivers.
The effect
of failure to comply is:
·
the arrangement, and any transaction entered into in pursuance of it, is
voidable by the company, unless for various reasons restitution is no longer
possible, or the transaction is affirmed by shareholders; resolution within a
reasonable period; and
·
the director involved, any connected person
involved and any other directors who authorised the arrangement or transaction are
each liable to account to the company for any gain which they have personally made,
and jointly and severally liable to indemnify the company for any loss or
damage resulting from the arrangement or transaction, even if the arrangement
is later affirmed by the shareholders.
In the
series of cases of re Duckwari plc it
was held that the indemnity for loss and damage is not limited to losses
arising from the transaction itself (e.g a sale at undervalue) but also extends
to any subsequent loss flowing from the transaction, such as a reduction in
value of the asset it acquired. It follows that if the company, without
shareholder approval, buys an asset from a director which goes up in value, it
keeps the profit, but if the asset value goes down, the company can either
avoid the transaction or claim its loss from the directors.
