Substantial property transactions
I have heard that the Act restricts substantial property transactions with directors. What does this mean?
You just might think that substantial property means a large building. If so, please remove this rather flippant thought from your mind. In this context it means any asset other than money. The aim is to stop directors and connected persons profiting by buying company assets or selling their property to the company.
With certain exceptions, directors (or connected persons) cannot buy or sell company assets unless:
the shareholders vote to give them permission; or
the true value of the asset is less than £5,000; or
the true value of the asset is less than the lower of £100,000 or 10 per cent of the company's net assets.
The figure for net assets is taken from the last set of statutory accounts. If no accounts have ever been prepared the amount of the called-up share capital is substituted. The restrictions apply to shadow directors as well as other directors, and they also apply to transactions with companies that are subsidiaries of the company of which the person is a director.
Who and what are 'connected persons' in connection with substantial property transactions?
The definitions are rather wordy but may be summarised as follows:
The director's spouse or civil partner (registered under the Civil Partnership Act).
A person of the same or other sex with whom the director lives as partner in an enduring family relationship. Such a person is not connected if he or she is the director's grandparent or grandchild, sister, brother, aunt, uncle, nephew or niece.
The director's children or step-children of any age.
The children or step-children of a person with whom the director lives as partner in an enduring family relationship, but only if they live with the director and have not attained the age of 18.
The director's parents.
In addition, subject to conditions and definitions which are too lengthy to include here, "persons connected" can include a company (in which the director holds a significant number of shares for example), a trustee and a partner or partnership.
My company has breached the rules concerning substantial property transactions. What are the possible consequences and remedies?
There are no criminal sanctions for breach of the requirements, though certain offences may have been committed incidental to the breach. The remedy is the power of the company to insist that the transaction be rescinded and the status quo restored. This is not an absolute right and the company may need to act quickly. The power to rescind will be forfeited if:
restitution has become impossible;
the transaction has been affirmed by a general meeting within a reasonable time;
rescission would prejudice the rights of third parties who have acted in good faith and in ignorance of the breach;
(d) the company has been indemnified in full against any loss caused by the transaction.
Substantial property transactions sound rather complicated. Can you give some practical examples?
All the following assume (which is very likely) that the articles allow the directors to transact with an individual director and that the directors agree to the proposal.
The director wishes to purchase for £1,000 a company car with a book value of £3,000 but a real value of £1,000.
There is no restriction.
The director wishes to purchase a company car for £6,000 with a book value of £1,000 but a real value of £6,000.
It is only possible so long as the net assets of the company are at least £60,000, or if the members vote to give permission.
The director wishes to purchase for £90,000 a company asset that is worth £96,000.
It is only possible so long as the net assets of the company are at least £960,000, or if the members vote to give permission.
The director wishes to sell to the company for £600,000 a house that is worth £600,000.
This can only be done if the members vote to give permission.
It should of course be remembered that there will be tax implications if a director buys or sells assets at other than the real value.
Is it allowed for directors to borrow company assets?
Yes it is allowed so long as the articles permit (as they almost certainly do) the directors as a whole to give permission. It should be remembered that the director will probably incur a tax liability, and that both the company and the director will probably have a duty to report the details to HMRC.
Can a company loan money to a director?
Advance approval by the members is necessary for loans, quasi-loans, credit transactions and related guarantees or security, made with a director or director of its holding company. There are a number of exceptions as follows:
Loans and quasi-loans not exceeding £10,000 outstanding at any one time.
Loans, quasi-loans and credit transactions to meet expenditure on company business up to £50,000 outstanding at any one time.
Money lent to fund a director's defence costs.
Small credit transactions up to a limit of £15,000.
Credit transactions made in the normal course of the company's business.
Loans and quasi-loans without limit made by a money-lending company, such as a bank in the course of its business.
There are no restrictions on quasi-loans and credit transactions, so long as the company is not a public company and is not associated with a public company.
Are there ways round the restrictions on a company making a loan to a director?
Not many and perhaps not any. In particular the following are not allowed:
A subsidiary company may not make loans to the directors of its holding company unless the aggregate does not exceed £10,000.
A company cannot guarantee a loan to a director made by a third party unless the aggregate commitments do not exceed £10,000.
What disclosure must a company make of loans to directors and connected persons?
The notes to the accounts must give full details of any loans to directors, or persons connected to a director, that were outstanding at any time during the year. The disclosed information must, where applicable, include:
The fact that a loan was made or existed during the year.
The name of the director or shadow director and, if applicable, the name of the connected person.
The amount loaned.
The amount outstanding at the beginning and end of the year.
The highest amount owing during the year.
Details of terms, any interest and any security.
Details must be given whether or not the loan or loans are in breach of the legal requirements.
Are there any restrictions on a director lending money to his company?