It is not uncommon for a company to sell an asset to one of its directors or for a director to acquire an asset from that company. It might be a car, a property, intellectual property rights or some other asset. But if care isn’t taken, and the asset is just transferred without following the required procedure, the transfer could be set aside.
What is the limit?
If an asset (not cash) is transferred by a company to a director, or is bought by a company from a director, and the value of that asset exceeds certain limits, it will be classed as a Substantial Property Transaction (SPT). The value of the asset must be more than £100,000 or 10% of the company’s asset value. Assets with a value of less than £5,000 are excluded.
Who is caught by the legislation?
A director of a company, or a director of its holding company, or a person “connected to” either director.
A director’s ‘connected persons’ are:
- Family members, such as the director’s spouse, civil partner, children (including adult children), parents and a person with whom the director lives in “an enduring family relationship” (we’re all waiting for the courts to tell us what that means)
- A company in which the director and his connected persons hold 20% of the shares or control 20% of the voting rights
- A trustee of a trust for the benefit of the director or any of this connected persons
- The director’s business partners (though not his fellow directors)
What to do if you’re over the limit
SPTs must be approved by the company’s shareholders by ordinary resolution (more than 50%). This approval must be given before the SPT is entered into or else the SPT must be conditional on approval being obtained.
Where the SPT is with a director of the company’s holding company, both the company and the holding company will need to pass an authorising resolution.
Failure to comply
If an SPT is entered into without shareholder approval, the company may choose to set aside the transaction. To prevent that happening the shareholders could affirm the transaction but that has to be done within a reasonable time. No guidance is given on what would be reasonable here but generally the right to affirm is easily lost, particularly where third parties have acquired rights based on the transaction.
Of more significance is the fact that the relevant director (or their connected person involved in the SPT), as well as any director who authorised the SPT, would have to account to the company for any gain they made from the SPT. They must also reimburse the company for any loss or damage.
SPTs are more common than you might think. As part of a departing director’s termination package the company may agree to transfer the director’s car, a house he’s been living in or a niche business in which he has been working. The values of assets transferred as part of the same arrangement or series of transfers are aggregated so the limits can easily be reached.
If you are concerned that an SPT may have taken place without shareholder approval, liaise with the company and seek to have the transaction ratified by the shareholders as soon as possible.