UK: Substantial Property Transactions

Robert Paterson highlights a few key changes to the law which will come into force on 1 October 2007.

If a company transfers non-cash assets either to or from a director of the company or its holding company, this will be classed as "substantial property transaction" if the value of the assets either:

• exceeds £2,000 and is worth more than 10% of the company’s net assets; or

• exceeds £100,000.

These provisions also apply to shadow directors or persons "connected" with the director. In broad terms, spouses, children, stepchildren under 18 and partners are all "connected" within the definition of the Companies legislation, as are companies where the directors (and persons "connected" with them) can exercise more than 20% of votes in general meetings or are interested in at least 20% (in nominal value) of the shares comprised in the equity share capital.

These so-called "substantial property transactions" must be approved by an ordinary resolution of shareholders before the transaction completes. If the director is a director of the holding company, an ordinary resolution of the holding company must also be obtained. A written resolution may be used for private companies.

Shareholders’ approval is not required for a company in creditors’ voluntary liquidation or compulsory liquidation.

It is required in the context of members’ voluntary liquidations and, following the case of Demite Limited v Protech Health [1998] BCC 639, for sales by receivers, whether administrative or otherwise. At present, approval is also required for sales by administrators.

If shareholder approval is not obtained, any transactions can subsequently be avoided by the company at the behest of its shareholders unless:

• restitution (return) of the assets or their proceeds is no longer possible

• the company has been indemnified for its loss

• third parties acting in good faith, for value and without notice of the Companies Act breach, would be affected

• the shareholders subsequently ratify the breach within a reasonable period of time.

Additionally, an individual who contravenes section 320 can be personally liable to return any profits or to indemnify the company for any loss or damage resulting from the unlawful transfer.

However a director will not be liable if he can show he took all reasonable steps to ensure compliance with section 320. Equally, a "connected" person (and any other director involved) will avoid liability if he can show that he did not know of the circumstances of the breach when the arrangement completed.

New Provisions – Companies Act 2006 The new Companies Act 2006 is the largest piece of legislation ever passed. Part 10 deals with substantial property transactions and on 1 October 2007 it will replace the old provisions. A few of the key changes are set out below:

• Administrators
  Sales to directors (or their "connected" parties) by a company acting by its administrators will no longer need any shareholder approval. The rationale is that the director’s conflict falls away when the company is controlled by administrators. The shares will, in insolvency situations, be worthless in any event.

• Threshold
  The minimum threshold in terms of value of the asset(s) being transferred will be raised from £2,000 to £5,000. Otherwise the value provisions remain unchanged, but note that the assets are viewed in aggregate for these purposes.
• Conditional Arrangements
  Companies will be able to enter into a substantial property transaction without prior shareholder approval provided the transaction is conditional upon such approval subsequently being obtained. If this is not forthcoming, the company will not be liable under the contract.

• Groups and Shareholders
  As was previously the case, shareholder approval is not required for transactions between:

• Service Contracts / Loss of Office
  Consent is not required for anything to which a director is entitled either under his service contract or by way of compensation for loss of office as defined in section 215 of the Companies Act 2006.
• Non UK-registered companies
  Transfers to wholly-owned subsidiaries fall outside the scope of these rules, as do transfers to or from companies which are not registered in the United Kingdom.

Many insolvency transactions have been unduly delayed in order to comply with the old section 320. Previously all shareholders had to be willing to sign a written resolution or the sale could not complete until after a members’ meeting had given sanction following the requisite notice period.

IPs will no doubt welcome the exclusion for administration sales, which should enable transactions to complete more quickly.

In other contexts where consent is still required, the provisions permitting conditional contracts will allow some flexibility, but will perhaps be used more in solvent transactions than recovery or insolvency situations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.