What is a Substantial Property Transaction?

• Posted onMay 12, 2023

What is a Substantial property transaction?

As a director of a company, there are certain responsibilities and rules that you must follow under the Companies Act 2006 (Act). In particular, the rules surrounding substantial property transactions must be closely adhered to.

A company may not enter a transaction where a director of the company or its holding company or a connected person acquires or is to acquire from the company (directly or indirectly) a substantial non-cash asset, or the company acquires or is to acquire a substantial non-cash asset (directly or indirectly) from a director or connected person, unless the transaction has been approved by an ordinary resolution passed by the shareholders of the company or is conditional on such approval being obtained.

This arrangement to transfer non-cash assets is classed as a “substantial property transaction”. A non-cash asset is classed as any interest other than cash, such as land, shares, machinery, property rights, fixed or floating charges.

What is a connected person?

A connected person is an individual or company that is connected with the director involved in the substantial property transaction. A connected person could be the director’s:

1. spouse of civil partner.
2. co-habiting partner in an enduring family relationship.
3. children or step-children.
4. partner’s children or stepchildren if they are under 18 and live with the director.

The connected person does not always have to be a direct connection, for example, an indirect connected person could be

Indirect connections are also covered, such as if a director has a shareholding or voting rights of at least 20% in a company, that company would be the connected person and the same as if a connected person and a director own between them 20% of a shareholding or voting rights in a company.

What is a substantial non-cash asset?

Under section 191 of the Act, an asset is a substantial asset if its value exceeds 10% of the company’s asset value and is more than £5,000 or exceeds £100,000.

A company’s “asset value” at any time is the value of the company’s net assets determined by reference to its most recent statutory accounts or if no statutory accounts have been prepared, the amount of the company’s share capital. Whether an asset is a substantial asset shall be determined as at the time the transaction is entered.

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 have been approved by an ordinary resolution of the shareholders of the holding company or be conditional on such approval being obtained.

Even though an transaction must be approved by shareholders, the Company will not be subject to any liability if they fail to obtain the required approval.

Exceptions where no shareholder approval is needed

There are some circumstances where the Company does not have to obtain approval, for example:

1. The company is not a UK-registered company.
2. the company is a wholly owned subsidiary, but if the director who is connected to the transaction is also a director of the holding company, the holding company must obtain shareholder approval.
3. The contract is between the company and the director but that director is acting in his capacity as a shareholder of the company.
4. The contract is between a holding company and a subsidiary.
5. The contract is between two wholly owned subsidiaries of the same holding company.
6. The company is in administration.

However, please note that where a director is entitled to the substantial property transaction under their service contract or for payment on loss of office, the substantial property transaction restrictions do not apply.

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