Table of Contents
In Short
- Definition of Substantial Property Transactions: These involve a company buying or selling a substantial non-cash asset (e.g., property or shares) from a director or connected person.
- Shareholder Approval Required: Transactions exceeding certain value thresholds must be approved by shareholders to avoid being voidable or incurring liability.
- Connected Persons: Includes close family members, certain business partners, associated companies, and trustees of relevant trusts.
Tips for Businesses
Before entering substantial property transactions, confirm if shareholder approval is needed, especially for high-value or connected-person dealings. Understand thresholds based on your company’s net asset value. Follow proper procedures, including obtaining an ordinary resolution, to ensure compliance and protect directors from personal liability.
As a company director, you should know the law places several restrictions on certain transactions. This includes restrictions on directors involved in a substantial property transaction. The consequences of breaching these restrictions can be substantial. Hence, this article will explain how the law defines substantial property transactions involving directors. That way, you can identify which transactions may increase your liability.
What is a Substantial Property Transaction?
A substantial property transaction is any transaction where your company buys or sells a substantial non-cash asset. In particular, you must buy or sell the asset from a:
- director of the company;
- director of the company’s holding company;
- person connected with a director of the company; or
- person connected with a director of the company’s holding company.
If any transaction meets the definition of a substantial property transaction, the company must obtain the approval of its shareholders. Otherwise, the transaction may be voidable. Likewise, the directors involved may face liability.
Further Considerations
To fully understand the definition of a substantial property transaction, we need to define:
- what a qualifying transaction involving a “substantial non-cash asset” entails;
- what a holding company is; and
- who a connected person may be.
Substantial Non-Cash Asset
As the term suggests, a transaction involving a substantial non-cash asset is anything other than a transaction for cash. This may involve the purchase or sale of:
- real property like land or buildings;
- heavy machinery, plants, or ships; or
- intangible property like shares, intellectual property rights or licences, and the benefit of contracts.
For all companies, if the asset’s fair market value is £5,000 or less, the asset is not substantial. Likewise, the asset is substantial if its fair market value is £100,000 or more.
Furthermore, non-cash assets between £5,000 and £100,000 may be substantial depending on the company’s net asset value (NAV). Specifically, if the value of the non-cash asset exceeds 10% of the company’s NAV, the law considers it substantial.
For example, say your company intends to buy a boat worth £80,000. Your company has an NAV is £1m. In this instance, the boat is not a substantial non-cash asset. However, say your NAV is £500,000. In this instance, the boat is a substantial non-cash asset.
Connected Person
The law defines a connected person in several ways, as the table explains below.
| Connected Person | Explanation | Examples |
| Member of the director’s family | This includes: + spouses and civil partners; + anyone that the director lives with as a partner in the capacity of an enduring family relationship; + children and step-children of the director or any children of the person with whom the director lives; and + parents of the director. | |
| Associated Company | An associated company includes any company where the director or someone connected to the director owns together 20% or more of the share capital of the other company. | You are a company director at YouCo Ltd. Your husband, who is neither a director nor a shareholder in YouCo, owns 25% of the shares in another company, HubbyCo Ltd. HubbyCo Ltd is a connected person. |
| Certain Trusts | A connected person is a trustee of a trust in which the director or a connected person has an interest. | Your son is a beneficiary of a trust set up by your cousin in his will and your uncle is the trustee. Your uncle is a connected person. |
| Certain business partners | Business partners of the director or business partners of a person connected to the director. | You are the company director of YouCo Ltd. You also have a general partnership business with a business with your university offering consulting services. Your university friend is a connected person. |
Holding Company
A holding company is any company that owns a majority of voting shares in another company. This other company is typically called a majority-owned subsidiary unless the holding company owns all the shares. In this case, you may hear the other company referred to as a wholly-owned subsidiary.
Assuming the non-cash asset is substantial, consider the following transaction: HoldCo Ltd owns all the voting shares in SubCo Ltd. SubCo Ltd buys a £150,000 building from the wife of a director of HoldCo Ltd. This is a substantial property transaction. However, HoldCo Ltd’s shareholders must approve the transaction rather than SubCo’s shareholders (only HoldCo).
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What Are Some Examples of Substantial Property Transactions?
Below are three examples of substantial property transactions (SPTs) and three that are not.
| SPTs | Not SPTs |
| Say you are a company director, and your company’s NAV is £100,000. The company purchases a car from your wife for £11,000. | Alternatively, say you are a company director, and your company’s NAV is £100,000. The company purchases a car from your cousin for £11,000. |
| Your wife is a company director of a company with a wholly-owned subsidiary, which purchases land from you for £200,000. | You are a company director, and your company’s NAV is £100,000. The company purchases a car from your husband for £6,000. |
| Say your brother-in-law pays £80,000 to purchase a boat from a company where you and your sister are directors. Your brother-in-law is your sister’s spouse. The company’s NAV is £500,000. | Your brother sells land to a company for which you are a director for £12,000. The company’s NAV is £80,000. |
Practical Considerations For Substantial Property Transactions
If you believe your company will enter a substantial property transaction, its shareholders can approve it. This ensures you nor the rest of the directors face any subsequent liability. Hence, you must convene a general meeting to pass the resolution approving the transaction. Subject to your company’s article of association, the shareholders must pass the resolution via an ordinary resolution.
Key Takeaways
As a company director, you should be aware that the law restricts you from entering transactions where the company is either the purchaser or seller of substantial non-cash assets without shareholder approval. Nor can the non-cash asset transaction involve a connected person. Ultimately, the exact value of a substantial non-cash asset depends on the company. A connected person includes the director’s close family, connected third-party companies, certain trusts and certain business partners. Your failure to obtain shareholder approval of the substantial property transaction means you may face personal liability.
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Frequently Asked Questions
A substantial property transaction is any transaction where your company either buys or sells a substantial non-cash asset from a director to certain connected third parties.
A connected person includes close family members like children, spouses, civil partners, and parents. It also includes business partners and certain trustees of trusts.
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