Transactions with Directors
by Sharon Fryer
In a recent case1 a transaction purportedly made between a company and one of its directors was found to be invalid, as it had not been properly authorised.
When a company is entering into a transaction with any of its directors, or any other entity with which a director is associated, it is essential to follow the procedures set out in statute and the company’s Articles of Association.
First, the director must declare to the board his interest in the proposed transaction2. He cannot be counted in the quorum for the board meeting at which that transaction is being discussed, nor vote on any board resolution relating to that transaction, unless the Articles of Association permit this.
He should also consider whether the proposed transaction creates a conflict of interest. By law3 , directors have a duty to avoid conflicts of interest so, to avoid being in breach of duty, he should have the conflict expressly authorised by independent directors (which can be difficult to find, especially in a smaller, family-owned company) or by a shareholder resolution. If a conflict of interest situation is likely to arise often (e.g. in a group of companies where the same people are on the boards of several entities) it may be more efficient to include this authorisation in the Articles of Association of each entity.
In some cases, the specific transaction will also have to be approved by shareholders. This most commonly applies in relation to “substantial property transactions” involving the transfer of assets worth either 10% of the company’s net assets (subject to a minimum threshold of £5,000) or, if lower, £100,000.4
However, it is not always possible for shareholders to approve or ratify transactions. For example, if the company does not have distributable reserves, the shareholders cannot authorise a transaction where the company receives less than market value or pays more than market value, since to do so could prejudice creditors and would amount to an unlawful distribution (even though the shareholders themselves do not receive anything).
1Dickinson v NAL Realisations (Staffordshire) Ltd  EWHC 28
2Companies Act 2006 (“CA 2006”), section 177
3CA 2006, section 175
4CA 2006, section 190