16 January, 2017
The Companies Act provides strict rules governing those situations where directors have an actual or potential conflict of interest with their company, for instance a Substantial Property Transaction (SPT).
An SPT involves a contract directly or indirectly between a director of the company (or someone 'connected' to him) and the company. The SPT rules state that where a 'non-cash' asset (for instance a piece of land or a property) is acquired and is deemed to be 'substantial' then in order to provide greater protection for the company the shareholders have a veto over whether the company should enter an SPT.
If shareholder approval is not obtained where it is necessary, the contract is voidable by the company and the director who was a party to the contract (or a person connected to such a director) will become liable to indemnify the company for any loss it has suffered.
The Court of Appeal has recently provided some much needed clarification as to when directors are required to obtain shareholder approval for an SPT. In Granada Group Limited v The Law Debenture Pension Trust Corporation Plc the company had an occupational pension scheme in place for all its employees which was approved by HMRC so as to qualify for tax relief on contributions, investments and benefits.
After an earnings cap was introduced by the Finance Act 1989 the company resolved to continue to provide new senior employees and directors with pensions based upon their full salary, so that they would not be disadvantaged in comparison with colleagues who had joined the scheme prior to the Finance Act coming in. In order to do so, it was necessary for the company, as employer, to enter into "top up" arrangements to provide the benefits.
The directors resolved that security should be granted for these arrangements that had already been made by the company in favour of its directors. The security was to be a first fixed equitable charge over certain gilts, which the company had acquired two days earlier in August 2000. In 2013, the company alleged that the charge was liable to be set aside because it contravened the SPT rules under the Companies Act 1985 (this how now been replaced by the Companies Act 2006, the principles are likely to be equally applicable).
The High Court and subsequently the Court of Appeal held that the directors did not themselves acquire a non-cash asset by virtue of the security arrangement. The pension trustee had been acting in its capacity as a trustee of a pension scheme and was not a 'connected person' for the purposes of the Companies Act.
The case provides useful guidance for analysing, on any given set of facts, whether the SPT regime applies. Given the consequences of not complying with the regime it is always important to make sure that you have considered the nature and extent of the transaction.
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