Substantial property transaction PDF

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Substantial property transaction

Law  S 190 to 196 - arrangements known as substantial property transactions (SPTs).  s 190(1) If director in personal capacity/someone ‘connected’, buys/sells something from/to company, consent of shareholders by resolution is necessary if the asset being bought or sold is of a ‘non-cash’ nature and is deemed to be ‘substantial’.  SPT - contract directly/indirectly between director and company, where there is the risk that director will be conflicted when acting for the company in deciding the terms of contract.  This interest gives rise to a requirement for disclosure by way of a declaration under s 177.  Requirements  s 190 – requirements to constitute an SPT – CHECK ALL 4 POINTS CAREFULLY:  (a) an arrangement (also referred to in the CA 2006 at times as a ‘transaction’);  (b) between the company and:  (i) one of its directors, or  (ii) a person ‘connected’ with such a director, or  (iii) one of its holding company directors, or  (iv) a person ‘connected’ with a holding company director;  (c) involving the acquisition of a ‘non-cash’ asset;  (d) that is ‘substantial’.  If all established then there will be an SPT and approval by the shareholders is needed.  Arrangement  Requirement for ‘arrangement’ in s 190(1) - contract between parties (eg to buy land).  it includes an understanding or agreement which is not contractually binding on the parties (Re Duckwari plc [1999] Ch 253).  Parties  A contract between the company and the director directly.  Persons connected to a director

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s 190 extends to a contract between the company on the one hand and a person connected with a director on the other. ‘Connected persons’ are defined in ss 252 to 256. most commonly occurring ‘connected persons’ under s 252(2):  (a) Members of the director’s family (CA 2006, s 252(2)(a)). This includes under s 253(2) a director’s:  (i) spouse or civil partner;  (ii) partner (straight or gay) with whom the director lives in an ‘enduring family relationship’;  (iii) children and step-children;

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(iv) partner’s (under (ii) above) children or step-children if they are under 18 years old and live with the director; (v) parents.

 Not ‘connected person’ - siblings, grandparents, grandchildren, uncles, aunts. (b) A body corporate connected to the director (CA 2006, s 252(2)(b)).  S254 of the CA 2006 defines those bodies corporate.  if the director/persons connected own at least 20% of the voting shares.  Daisy alone does not reach the 20% threshold, but when her shareholdings are

added to those of a connected person she does.

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In Figure 7.5 Craig is not a person ‘connected’ to her. He is Daisy’s brother and so falls outside the definition of ‘family member’ in s 253 of the CA 2006.  Acquisition of a non-cash asset  next stage under s 190(1) is to check that contract relates to acquisition of a non-cash asset (NCA).  NCA defined in s 1163 of the Act - ‘any property or interest in property, other than cash’ – even a charge.  assets such as land, machinery, shares and property rights (lease and certain security such as a mortgage or fixed and floating charges).

 Substantial NCA  s 190(1) contract must be for a substantial NCA, defined in s 191.  There are three separate thresholds which we need to consider:  (a) £5,000 or less, not ‘substantial’ and will not be a SPT (s 191(2)). - ‘de minimis’ provision and excludes minor contracts between the director and the company.  (b) over £5,000 but not more than £100,000, ‘substantial’ only if value exceeds 10% of the company’s asset value (s 191(2)(a)).  (c) If the value over £100,000 it will always be ‘substantial’ (s 191(2)(b)).  The value should be determined at the date the contract is entered into (CA 2006, s 191(5)).  value of a series of contracts aggregated to see if thresholds have been met (s 190(5)).  Effect of being an SPT  Under s 190(1) of CA 2006, the SPT must be approved by ordinary resolution.  approval before the contract is entered into, or contract made conditional on approval.  Exceptions  S190 does not apply to director’s entitlements under a service contract or to payments to a director for loss of office (CA 2006, s 190(6)).  Approval by the shareholders under s 190(1) is not required in the following cases:  (a) where the company is a wholly-owned subsidiary of another company (s190 (4) (b)) – Holding company must pass resolution (s190 (2))  (b) contract between company and director in his capacity as shareholder of the company (s 192(a)).  (c) a contract between a holding company and one of its subsidiaries (s 192(b)(i));  (d)contract between two wholly-owned subsidiaries of the same holding company (s 192(b)(ii)); and  (e) if the company is in administration or being wound up (and is insolvent) (s 193(1)).  Breach of section 190  s 195(2) if approval not obtained where necessary, contract is voidable by the company unless certain conditions apply, eg where restitution of property/money is not possible.  s 195(3), a director who was party to the contract, a person connected to such a director and any other director who authorised the contract become liable to indemnify the company for loss it has suffered, and to account to the company for any gain made.  shareholders to ratify the failure to obtain shareholder approval by ordinary resolution within a reasonable period of time (CA 2006, s 196).  British Racing Drivers’ Club Ltd v Hextall Erskine & Co (A Firm) [1996] 3 All ER 667,  Demite Ltd v Protec Health Ltd [1998] BCC 638 and  Re Duckwari plc (No 3); Duckwari plc v Offerventure Ltd (No 3) [1999] 1 BCLC 168. Procedure/resolution 1. BR to approve draft terms of property purchase 2. GM to pass ordinary resolution to give permission to directors to enter into SPT a.

"THAT the [purchase OR sale] by the [Company OR Company's subsidiary, [NAME OF SUBSIDIARY],] of [DESCRIPTION OF NON-CASH ASSETS ACQUIRED OR DISPOSED OF] for the sum of £[AMOUNT] [from OR to] [[NAME OF COMPANY OR PERSON] being

a [company ORperson] connected with] [NAME OF DIRECTOR] a director of the [Company OR Company's holding company, [NAME OF HOLDCO],] be approved."

3. BR to enter into property purchase contract 4. BR to authorise 2 directors to execute contract on behalf of the company.

[the board can now complete the transaction under their general powers in MA 3 and will resolve to: [enter into the contract for sale/purchace]; [authorise a director to execute that contract]

Admin  MA 15 and s248 CA 2006 – record of decisions for board meeting kept for 10 years  S355 - record of decisions for general meeting kept for 10 years...