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Fact pattern

Sue Charles has recently become a director of Morrat Limited (“Morrat”). Since becoming a director, she has been devoting increasingly more time to the business of Morrat, with the consequence that she is selling a number of other business interests. One of Sue’s other businesses was run from premises owned by Sue’s husband, Martin Charles. Morrat is interested in purchasing these premises from Martin Charles to provide an additional warehousing facility.

Section 190 CA 2006 controls arrangements where directors or persons connected with a director either acquire from or sell to the company a substantial non-cash asset. Connected persons include (amongst others) a director’s spouse, in this case, Martin.

A substantial non-cash asset is one which has a value which either, at the time of the transaction exceeds 10% of the company’s asset value and is more than £5,000, or exceeds £100,000. Here, the value of the asset falls within the first category.

Having provided this advice, you are informed that negotiations are in hand to reduce the price of the premises to £69,500, to take account of not having to pay any agents’ fees on the sale.

If the price for the premises was to be reduced in this way, the transaction would still fall within s190, as it is market value which should be attributed to the asset in question for the purpose of the section.

The best route of action, if a transaction falls within s190, is to approve the contract by an ordinary resolution of the members prior to the board sanctioning the transaction. Alternatively, the contract could be made conditional on such approval being obtained after the board decision. The latter course might be taken if time is of the essence, for example.

If the premises are sold in contravention of s190 CA 2006, then the transaction is voidable by the company (i.e. it is valid until the company decides otherwise) unless:

1. an ordinary resolution affirming the transaction is obtained within a reasonable time (s. 196); or
2. certain other circumstances (set out in s195(2)) exist which exclude avoidance of the transaction.

There is potential liability for Sue and Martin Charles, together with the other directors of Morrat. Although Martin is not a director, he is connected with a director and, therefore, falls within the category of persons in s. 195(4)(b). Sue Charles will be within the category of persons set out in s. 195(4)(c). All other directors who consented to the transaction will fall within s. 194(d).

Their potential liability is to account to the company for any gain that they made or to indemnify the company for any loss which it suffered as a result of the transaction.

As brother to Sue, Martin would no longer be a person connected with a director. The main categories of relatives connected with directors are a director’s spouse or civil partner, children or step-children and parents.