#5308 - Risky Transactions - Company Law

Risky Transactions 1

There are additional controls on directors in relation to particular transactions which are seen as especially risky.

Directors long term service contracts

Any service contract entered into between the company and a director must be authorised by an ordinary resolution of the members if the contract is longer than 2 years. (CA2006 s.188)

If a resolution is not obtained then the additional period is void and the contract may be terminated by the company giving reasonable notice at any time. (CA2006 s.189)

Substantial property transactions

A company may not enter an agreement whereby either:

1. A director or a person connected with a director acquires or is to acquire from the company (directly or indirectly) a substantial non cash asset. Or

2. The company acquires or is to acquire a substantial non cash asset (either directly or indirectly) from such a director or such a person connected to such a director.

Unless the arrangement has been approved by a members resolution as is conditional upon such approval being obtained.

A substantial non cash asset nears an asset which either: has a value of over 5000 and more than 10% of the company’s asset value or an asset which has a value over 100000.

A company’s asset value is the net assets according to the most recent accounts or, in the absence of accounts, the amount of called up share capital. (CA2006 s.191)

A noncash asset includes any property or interest in property other than cash. The transfer or acquisition would include the discharge of a liability or the creation or extinction of any interest in property. (CA2006 s.1163)

A person connected with a director includes:

1. Members of the directors family

2. A corporate body with which the director is connected

3. A trustee whose beneficiaries fall within either 1 or 2 other than a other than a pension or employee share scheme trustee.

4. A person in a partnership with the director

This list is exhaustive. (CA2006 s.252)

Members of the directors family means a spouse or other enduring partner, children of the director, other children who live with the director, the directors parents. (CA2006s.253)

A director is connected with a corporate body if the director and people connected with him hold more than 20% of the total share capital or 20% of the total voting rights. (CA2006s.254)

Transaction can be affirmed by a member’s resolution post facto. (CA2006s.196)

Remedies

The transaction is voidable at the instance of the company unless restitution is no longer possible or the company has been modernised for any loss or damage suffered or a third party has acquired rights as a bona fide partner for value without notice. (CA2006s.195(2) )

Whether or not the transaction is made void, any director or connected person involved in the transaction will be jointly and severally liable to account for any profits from the transaction and to indemnify the company against any loss it suffered as a result. (CA2006s.195(3) )

Duckwari

The directors involved in the transaction, and their connected companies, were liable for the total amount of the loss including any accentuation of the loss caused by a falling market value.

Regulation of loans and credit transactions

A company may not make a loan to a director without authorisation from the members.

Neither may the company guarantee or provide security for any loan taken out by the director personally. (CAs.197(1))

CAs.198 and CAs.201 also prevent quasi loans and credit transactions in the...