Substantial property transactions involving directors (section 190 companies act 2006)

Under section 190(1) of the CA 2006 substantial property transactions between a company and: (a) its director, or (b) a director of its holding company, or (c) in each case a person 'connected' with such a director are prohibited, unless the property transaction is either approved by ordinary resolution of the members of the company or is conditional upon such approval being granted. If the company is also a charity, the consent of the charity commissioners is also required. If the director or connected person is a director of the company's holding company or a person connected with such a director, the arrangement must also be approved by a resolution of the members of the holding company or be conditional on such approval being obtained (section 190(2), CA 2006). 

The purpose of the substantial property transaction regime is to “give shareholders specific protection in respect of arrangements and transactions which will or may benefit directors to the detriment of the company” (Duckwari plc v Offerventure Ltd (No 1) [1999] Ch 253, Nourse LJ at page 264). It is worth noting that the protection is not confined to instances of deliberate disloyalty of the directors, but it is meant to offer an additional layer of protection to that offered by the general duties of directors, and in particular section 177 of the CA 2006.

In order for a transaction to constitute a “substantial property transaction” and be caught by the relevant provisions, it must involve the transfer or acquisition, whether by way of sale, exchange or gift, of a 'substantial non-cash asset'. Section 1163(2) further extends the meaning of “transfer or acquisition”, providing that a reference to the transfer or acquisition of a non-cash asset does, also, include: (a) the creation or extinction of an estate or interest in, or a right over, any property and (b) the discharge of a liability of any person, other than a liability for a liquidated sum.

For the purposes of section 190 a "non-cash asset" is defined to mean any property or interest in property other than cash, and a transaction will be considered “substantial” if it amounts to the lesser of: (i) £100,000 and (ii) 10% of the company's net assets at the time the transaction is entered into, subject to a threshold of £5,000. 

Similarly to the restrictions concerning loans to directors, the term “director” does also encompass here shadow directors and whether a person is 'connected' to a director will be established by reference to section 252-4 Companies Act 2006. Pursuant to this section the “connected person” reference shall include members of a director’s family and companies controlled by a director alone or with other connected persons.

As with loans to directors, there is an exception to the general rule of section 190(1): in particular, no member approval is required for a substantial property transaction where the company carrying out such transaction is either not a UK-registered company, or is a wholly owned subsidiary of another body-corporate (section 190(4), CA 2006). This means that in many cases where there is a group structure there is no restriction at all, although one has to watch the holding company rule as it might be alright at the subsidiary level but still need approval at holding company level as often the director is director of both.

Finally, no approval is required under the said rule in relation to transactions between wholly owned subsidiaries or a wholly owned subsidiary and its holding company nor for a transaction between a company and its director in his capacity as a shareholder (e.g. paying dividends). 

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