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Summary BPP Business Law Exam Consolidation
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Answer StructuresSubstantial Property Transaction (SGS 11)
What kind of SPT transaction? - s190(1)(a) or s190(1)(b)?
On the face of the transaction is appears to be a substantial property transaction
under s.190(1)(a) as a substantial non-cash asset is being acquired from the
company by X, who appears to be connected to one of the company’s directors (X).
On the face of the transaction is appears to be a substantial property transaction
under s.190(1)(b) as a substantial non-cash asset is being acquired by the company
from one of its directors (X) OR from X, who appears to be connected to one of the
company’s directors (X).
Substantial NCA? S191(2)(a)/(b) test?
An asset is a substantial asset if it exceeds 10% of the company’s asset value and is
more than £5000 (s.191(2)(a)) or it exceeds £100,000 (s.191(2)(b)).
The X is a substantial non-cash asset under s.191(2)(a) as its value is £X, which
surpasses the £100,000 threshold.
Is X “person connected” with director of the company under s252-254? Where do we find
director’s shareholding?
Under s.252(2)(a), a person connected with a director of a company includes
members of the director’s family.
o Under s.253(2), members of the director’s family include spouse or civil
partner (a), children or step-children (c) and parents (e).
Under s.252(2)(b), a person connected with a director includes a body corporate with
which the director is connected.
Under s.254(2), a director is connected with a body corporate if he holds 20% of the
share capital or is entitled to exercise more than 20% of the voting power at any
general meeting. X holds x% of Y’s share capital and, therefore, fulfils the test of
being a director connected with a body corporate.
Do we need a s190(1) OR?
An ordinary resolution is required under s.190(1) as X is a substantial non-cash asset
which is being acquired by…
Can we affirm by OR afterwards?
It is possible to affirm the transaction afterwards by way of ordinary resolution under
s.196 provided that it is within a reasonable time.
Consequences of not getting SH approval under s195
If SH approval is not obtained, s.195 provides that the transaction is voidable by the
company unless restitution is no longer possible, the company has been indemnified
or bona fide rights have been acquired by a TP which would be affected by the
avoidance of the transaction (s.195(2)).
Whether or not the transaction has been avoided, the director, the person connected
and any other director who authorised the arrangement are liable to account to the
, company for any gain made directly or indirectly out of the transaction and indemnify
the company for any loss or damage (s.195(3) and (4)).
Long term service contract (SGS 11)
Is this potentially long-term service contract under s188 (1)/(2)?
Under s188 CA 2006, shareholder approval by ordinary resolution is required for any
director’s services contract which is, or may be, for a guaranteed period in excess of
two years.
The guaranteed period also applies to aggregate periods. X is a potentially long-term
service contract under s188(1)(a) as, subject to the service of a roll over notice, the
term of her/his appointment may be extended by X years, which gives an aggregate
total term of X years.
Definition of “guaranteed term”-s188(3)(a)(i) - Other than at instance/decision of company?
Specified circumstances under s188(3)(a)(ii)? Conclusion
Under s188(3)(a), a guaranteed term of a director’s employment includes a period
during which the contract is to continue other than at the instance of the company
and during this time the company either cannot terminate the contract or can only
terminate in specific circumstances. Clause Y in X’s new contract allows her/his term
of appointment to be extended by her serving a Rollover Notice of the Company,
which satisfies s188(3)(a)(i). Pursuant to clause Y of the contract, (company) may
terminate X’s employment without notice and without payment in lieu of notice for
disciplinary reasons. This clause fulfils the requirement of termination in specified
circumstances under s188(3)(a)(ii).
Do we need OR under s188?
Consequently, an ordinary resolution is required under s188 as the guaranteed term
may be in excess of 2 years and the company can only terminate her contract in
specified circumstances which therefore means that X’s new service contract is a
long-term service contract.
Consequences of not getting s188 OR under S189(a) + (b)?
If such approval is not obtained, s.189(a) provides that the renewal provision in X’s
contract will be void and the contract will be deemed to contain a term entitling the
company to termination on reasonable notice under s.189(b).
Loans to directors (SGS 13)
What is the nature of the company?
‘X is a public limited company/company associated with a public limited company’
What is the nature of the transaction?
Loan/quasi-loan/credit transaction/guarantee or security
With director of company/director of holding company/connected person
‘X is providing a security for a loan made by a bank to a director of its subsidiary
company’
‘X is providing a guarantee for a loan to the husband of one its holding company’s
directors’
,Is shareholder approval needed? If so, under what section and what company needs
approval?
‘Section 197(1)(b) states that a company may not give security for a loan made to a
director of the company or of its holding company, unless SH approval is obtained.’
o ‘Y is not a director of X, so no SH approval is needed’
o ‘Y is a director of X/X’s holding company, so SH approval is needed’
‘Pursuant to s.200(2)(b), SH approval is required as a company (associated with a
plc) is providing a guarantee for a loan made to a person connected to a director of
its holding company (X is a director of Y). A husband is a person connected to a
director pursuant to s.252(2)(a) and s.253(2)(a). The holding company (Y) will need
to obtain SH approval (s.200(3)). Z is a wholly-owned subsidiary and therefore will
not need to obtain SH approval (s.200(6)(b)).’
If SH approval is required, is there a statutory exception under s.207 or s.209? Disapply if
relevant
s.207(1): exception for loan or quasi-loan, or to give a guarantee or provide security
in connection with a loan or quasi-loan, if the aggregate value does not exceed £10k
s.207(2): exception for credit transaction, or to give a guarantee or provide security in
connection with a credit transaction, if the aggregate value does not exceed £15k
s.209: exception for loan or quasi-loan, or to give a guarantee or provide security in
connection with a loan or quasi-loan, by a money-lending company
‘As the value of the transaction does not exceed £10,000, Z will be able to rely on the
minor transactions exception in s.207(1) and will not need to obtain SH approval.’
‘As the value of the transaction exceeds £10,000, the minor transactions exception in
s.207(1) would not apply.’
If no exception, what is the sanction for not obtaining SH approval and for which persons?
s.213 and s.214
Are the directors complying with their statutory duties?
s.172 and s.177
‘The directors will need to demonstrate that they have complied with their statutory
duties, particularly pursuant to s.172, when authorising a high value guarantee to the
relative of a director’
NB: if SH is needed, memorandum setting out details of transaction needs to be prepared +
made available for inspection at company’s registered office for at least 15 days ending with
date of GM or sent out with WR (s.197(3), s.198(4), s.200(4) + s.201(4))
Prepayment/Accruals Explanation (SGS 10)
In the profit and loss account the X expense will reduce by £X and therefore the profit will
increase by £X. As regards the balance sheet, the increased profit in the profit and loss
account will be reflected in an increase in the retained earnings in the bottom half of the
balance sheet. The prepayments figure in the current assets section of the top half of the
balance sheet will also increase by £X, resulting in a corresponding increase in the net
assets which will mean that the balance sheet will still balance.
, Preference
The payment to Bank A is potentially challengeable as a preference by the liquidator
applying to the court (s.239(2) Insolvency Act 1986) (IA) for an order setting aside the
payment (s.239(3) IA).
Bank A was a creditor of the Company (s.239(4)(a) IA) and appears to have been put in a
better position in the event of the Company going into insolvent liquidation (s.239(4)(b) IA)
because it was paid off in full (and seemingly ahead of other creditors).
The payment was made within the ‘relevant time’, which, because Bank A is an unconnected
person, is within 6 months (on the facts, within about three weeks) before the onset of
insolvency (s.240(1)(b) IA). The onset of insolvency is defined under s.240(3)(e) and
s.129(2) IA as the time of the presentation of the winding-up petition, in this case, 24 June
2020.
Under s.240(2) IA, the liquidator must prove that the Company was insolvent at the time or
became insolvent as a result of the payment. We are aware that the Company was in
financial difficulties in May 2020 as it was not paying some debts on their due date for
payment and therefore it appears the Company was unable to pay its debts in accordance
with the definition provided in s.123 IA at the time the loan was repaid on 31 May 2020.
However, under s.239(5), no court order will be made to set aside the payment unless the
liquidator can show that the Company was ‘influenced by a desire to prefer’ Bank A as a
creditor. We would need to check the terms of the April 2018 loan agreement. If the loan
agreement contained an event of default clause entitling Bank A to require full and
immediate repayment of the loan, for example, because the Company was insolvent
(evidenced by its failure to pay its debts as and when they fell due), Bank A would have
been justified in demanding repayment and commencing winding up proceedings if the
Company did not repay the loan. In such a case, it is likely that the Company, in deciding to
repay Bank A, was reacting to commercial pressure applied by Bank A and this would
suggest there was no ‘desire to prefer’ on the part of the Company. Desire is not presumed
on the facts of the present case as Bank A is an unconnected person (s.239(6) IA)). It
therefore follows that, on our facts, it is unlikely that the liquidator would succeed in
challenging the payment as a preference under s.239 IA.
The position would be more complicated if there had been no event of default on which Bank
A could rely to require premature payment of the loan as in this case, the threat to
commence winding up proceedings may have been an empty one. But even in this situation,
it appears that the Company wished to replace Bank A with Bank B as its banker and if it
wished to do this because, for example, it did not have a good relationship with Bank A or
because it wished to borrow more money from Bank B than Bank A was willing to provide (it
is to be noted that Bank B lent £200,000 whereas Bank A had lent the lower sum of
£150,000), then it is likely the directors will say that their desire was not to place Bank A in a
better position in its liquidation but rather to have new lending arrangements with another
Bank which were more advantageous to it.
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