Substantial property transactions with a director: members' approval (CA 2006 ss.190-191)
Kestrel Joinery Ltd is a private company whose shares are held equally by three individuals, including Daniel Osei, who is also one of its two directors. The company's most recent statutory accounts show net assets of £400,000. Daniel owns a nearly new delivery van, valued at £45,000, which he has agreed to sell to the company for that price. The other director is happy with the deal and wants to sign the purchase agreement at a board meeting next week, after Daniel has declared his interest. The company's articles contain no relevant special provisions.
Which of the following best describes what the Companies Act 2006 requires before Kestrel Joinery Ltd buys the van?
Choose one answer to see the reasoning.
Worked answer
Correct answer D: The purchase must be approved by a resolution of the members, or the agreement must be made conditional on such approval being obtained.
THE RULE TO REMEMBER
A company buying a non-cash asset from, or selling one to, a director needs members' approval (or a conditional contract) if it is worth over £100,000, or over 10% of net assets and over £5,000.
Substantial property transactions with a director: members' approval (CA 2006 ss.190-191)
Under s.190(1)(b) of the Companies Act 2006 a company may not enter into an arrangement under which it acquires a substantial non-cash asset from a director unless the arrangement has been approved by a resolution of the members or is conditional on such approval being obtained. Under s.191(2) an asset is substantial if its value exceeds 10% of the company's asset value and is more than £5,000, or exceeds £100,000. The company's asset value is its net assets per its most recent statutory accounts (s.191(3)(a)), here £400,000, so the 10% threshold is £40,000. The van, at £45,000, exceeds that figure and is more than £5,000, so it is a substantial non-cash asset. Kestrel is not a wholly-owned subsidiary, so the s.190(4) exemption does not apply. Section 190 does not specify the type of resolution, so under s.281(3) an ordinary resolution suffices unless the articles require more.
Why A is wrong: The £100,000 limb is only one test; the van exceeds 10% of net assets (£40,000) and is over £5,000, so it is substantial under s.191(2)(a).
Why B is wrong: A s.177 declaration to the board does not satisfy the separate members' approval requirement in s.190.
Why C is wrong: Section 190 requires only a resolution of the members, which is an ordinary resolution under s.281(3) unless the articles require more.
Why E is wrong: Section 190(1)(b) applies where the company acquires a substantial non-cash asset from a director.
That's today's practice done. Another featured question tomorrow.
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