Law guide: Business start-up

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Directors' transactions needing members' approval

Directors' transactions needing members' approval

Company law places certain controls on directors and their dealings with the company in order to protect the company. These are situations in which directors' personal interests conflict with the company's interests.

Payments for loss of office

Your company can't pay a director compensation of more than £200 for loss of their office as a director unless the payment has been approved by the shareholders ('members'). They can approve this by voting, or 'passing' an ordinary or written resolution (see Shareholder meetings for more information on resolutions).

This applies to compensation for their loss of any other position (e.g. as an employee or manager) as a result of no longer being a director. It also applies to any payment in connection with them retiring as a director. Compensation here includes non-cash benefits.

This rule is aimed at payments as a gift or token of appreciation, which the company has no legal obligation to make. The shareholders don't need to approve a payment that the director is entitled to under the director's service contract, or by law, e.g. if the company owes them statutory redundancy money or damages for breach of contract.

Substantial property transactions

Your company can't enter into a substantial property transaction without the consent of the shareholders. A substantial property transaction is an arrangement by the company to buy a substantial non-cash asset from or sell a substantial non-cash asset to a director or person connected with a director. A person connected to the director would include their spouse, child, parents and a company in which the director and people connected with the director together have more than 20% of the voting shares.

If the asset is worth £5,000 or less, it won't be a substantial property transaction. If the asset is worth more than £100,000, it'll always be a substantial property transaction. If the value of the asset is over £5,000 and up to £100,000, it'll qualify as a substantial property transaction if it's worth more than 10% of the company's net assets. The company's net assets means the net assets figure shown on the latest set of accounts or, if no accounts have been prepared, the amount of the company's share capital.

The shareholders must pass an ordinary resolution or written resolution to approve a substantial property transaction.

Service contracts

The members of your company must approve any director's service contract for a guaranteed fixed term of more than 2 years (see Appointing directors for more information).

Loans to directors

Without the approval of the members, your company can't:

  • make a loan to a director; or
  • give a guarantee or provide security to any person who is giving a loan to a director.

The members must approve the loan by passing an ordinary resolution or by written resolution. Before the members vote on a resolution to approve a loan to or guarantee for a director, they must be given a memo setting out:

  • the nature of the transaction;
  • the amount of the loan and the purpose for which it is required; and
  • the extent of the company's liability under any transaction connected with the loan.

If the resolution is passed at a general meeting, this memo must be made available for members to inspect both:

  • at the company's registered office for not less than 15 days ending with the date of the meeting; and
  • at the meeting itself.

Alternatively, if the members vote by written resolution, this memo must be sent to every member at the same time or before the time the proposed resolution is sent to the member.

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