Substantial property transactions and the acquisition of non-cash assets
A recent Court of Appeal case has provided some useful guidance on ‘substantial property transactions’ and the acquisition of non-cash assets.
The recent Court of Appeal case of Granada Group Ltd v The Law Debenture Pension Trust Corporation Plc  EWCA Civ 1289 (Granada Group) has provided some useful guidance on ‘substantial property transactions’ and the acquisition of non-cash assets by a company from its directors and vice versa.
A reminder of the current law
Subject to certain limited exceptions, a company is prohibited from entering into an arrangement whereby:
- A director of the company or of its holding company, or a person connected with such a director, acquires or is to acquire a substantial non-cash asset from the company (directly or indirectly); or
- The company acquires or is to acquire a substantial non-cash asset (directly or indirectly) from such a director or from a person so connected,
unless the arrangement has been approved by a resolution of the shareholders in general meeting (or the passing of a shareholder written resolution). If the director is a director of its holding company, a resolution in general meeting (or shareholder written resolution) of the holding company is also required. Alternatively, the arrangement can be entered into by the company and director conditional on such approval being obtained (which approval must be obtained within a reasonable period).
Transactions such as this are known as ‘substantial property transactions’ and the prohibition appears in section 190 of the Companies Act 2006.
Shareholder approval is required if the assets 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.
If there are numerous assets involved, of if there is a series of transfers of assets as part of the same arrangement, the value will be aggregated in establishing whether these thresholds are exceeded.
"Arrangement" is not defined in the legislation, but it is a word which is widely understood to include agreements or understandings which have no contractual effect.
The Granada Group case confirmed that the company must enter into the "arrangement", but the director (or connected person) need not be a party to it. There will be a breach of the Companies Act if the arrangement causes the director, or a connected person, to acquire (or enables them to acquire in the future) one or more non-cash assets of the requisite value from the company.
What is a “non cash asset’?
A ‘non cash asset’ is "any property or interest in property other than cash". This includes "the creation or extinction of an estate or interest in, or a right over, any property" and, interestingly, the Court of Appeal in the Granada Group case agreed "acquisition of a non-cash asset" embraces rights which, while not proprietary, may properly be described as rights in or over property. The key is that such rights should be legally enforceable.
Failure to obtain shareholder approval to a ‘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 has made from the transaction and will be required to indemnify the company in respect of any loss or damage it suffers as a result. The directors may also find themselves in breach of their more general statutory duties under the Companies Act.
Such transactions are voidable by the company – so the company can apply for the transaction to be set aside and to have the money/property returned. The shareholders can affirm the transaction after completion provided this is done within a reasonable period (once affirmed, the transaction is no longer voidable).
The Court of Appeal upheld the High Court’s decision that directors’ shareholdings in a secured unfunded unapproved retirement benefits scheme did not amount to the acquisition by them of a non-cash asset from the company.
The Court of Appeal also confirmed that the general purpose of the substantial property legislation is to give a right of scrutiny to shareholders of a company where the directors have an actual or potential conflict of interest and hence might be tempted to depart from their general fiduciary duty to act in the best interests of the company (now enshrined in the Companies Act 2006 as part of the statutory duties of a director).
Sarah Walton is a partner in the corporate team and may be contacted on 0161 214 0529 or email firstname.lastname@example.org.