Transacting with Directors: Understanding substantial property transactions

A substantial property transaction involves a company disposing of, acquiring, or entering into an arrangement regarding, a substantial non-cash asset, where the other party to such transaction is one of the company’s directors, or a person connected to one of its directors.

Section 190 of the Companies Act 2006 plays a crucial role in safeguarding the interests of shareholders in relation to such transactions, by preventing the directors of a company from abusing their position in order to make gains or receive benefits from the company’s assets to the detriment of the company.

Identifying a substantial property transaction

A transaction or arrangement falls within section 190, if:

1. It is entered into between the company and a director, or a person connected with a director, of the company or its holding company
2. It involves a non-cash asset (typically land, buildings, and other tangible properties, but can be anything other than cash)
3. The value of the asset exceeds:

• 10% of the company’s asset value (provided this is in excess of £5,000); or
• £100,000, unless the transaction falls within the limited exception outlined in the Companies Act (the exceptions are not considered further in this blog).

Approving a substantial property transaction

1. Approval of members: Section 190 mandates that any substantial property transaction requires the approval of the company’s members, typically by way of an ordinary resolution. This ensures that shareholders, as the ultimate owners of the company, have a say in transactions that could significantly impact the company’s assets.
2. Disclosure and documentation: Companies involved in substantial property transactions must provide detailed information about the transaction to their members when seeking approval for the transaction. This includes disclosing the nature and value of the property and the consideration involved, together with any other relevant information. This is aimed at enabling shareholders to make informed decisions about the transaction.
3. Interested directors: If any directors of the company have a material interest in the transaction or arrangement, they must disclose this interest to the board. Interested directors are generally prohibited from voting on any related board resolutions unless their participation is authorised by the company’s articles, or by a resolution of the non-interested members.

Consequences of non-compliance with section 190

Failure to comply with the provisions of section 190 can have serious consequences. The transaction may be voidable by the company or any affected party.  In addition, directors and their connected persons involved in non-compliant transactions may be liable to:

• Account to the company for any gains made or benefits received by them; and/or
• indemnify the company lor any losses or damaged suffered by the company, as a result of the transaction or arrangement.

Please contact our Corporate team by phone 0113 207 0000 for advice or assistance with any transaction or arrangement that may fall within the remit of section 190 of the Companies Act.