The second-hand kiln: a connected-person purchase
Harlow Ceramics Ltd has net assets of £600,000. Its issued shares are held by Anya (45%), Ben (45%) and Cass (10%). Anya and Cass are the only directors; Ben is a shareholder but not a director. Cass's wife owns Kilnworks Ltd. Harlow's board wants to buy a second-hand kiln from Kilnworks Ltd for £95,000, which Anya considers a fair market price and wants completed before the year end. Cass is enthusiastic about the purchase but has said nothing to Ben. The company's articles are unamended and contain no relevant authorisation. Cass holds no shares or office in Kilnworks Ltd himself; his only link is his wife's ownership of it. Anya asks you whether the board can simply proceed.
1. Can the board resolve to buy the kiln, or is shareholder approval needed? If approval is needed, whose votes will count?
Read the worked answer
This is a substantial property transaction (CA 2006, ss.190–191). The company is acquiring a non-cash asset from a person connected with a director (a spouse is a family member and so a connected person under ss.252–253).
Value test (s.191): the asset must be of the 'requisite value', i.e. worth more than £5,000 and more than 10% of the company's asset value, or more than £100,000.
- 10% of £600,000 = £60,000.
- £95,000 exceeds £60,000 and exceeds £5,000. (It does not exceed £100,000, but that limb is disjunctive, so it does not matter.)
So member approval is required by ordinary resolution before the arrangement is entered into (s.190(1)), or the arrangement must be conditional on that approval.
Whose votes count (s.223): the votes of Cass and of any connected person who holds shares are disregarded. Cass's wife holds none, so only Anya's 45% and Ben's 45% are voted. Anya's support alone gives 45 out of 90 votes cast – a tie, not a majority. On a poll the resolution would fail.
Conclusion: Anya cannot carry the resolution without Ben. In practice the firm should advise that Ben must be notified and a general meeting (or written resolution) held, and that Ben's agreement is essential.
2. Suppose the kiln is bought and paid for without member approval. What are the consequences for the company, for Cass and for Anya, and can the members fix it afterwards?
Read the worked answer
Effect of the transaction: under s.195 the arrangement is voidable at the instance of the company, and the director and any connected person who is a party are accountable to the company for any gain and must indemnify it for any loss or damage. Harlow could therefore rescind and recover the £95,000 (subject to the usual limits on rescission where third-party rights have intervened or restitution is impossible).
Cass's separate breaches: he should have declared the nature and extent of his interest in the proposed transaction to the board (s.177), and the conflict falls within s.175. Failure to declare is a criminal offence (s.183). Authorisation of a s.175 conflict requires the independent directors to act; with only Anya independent, the safest course was member authorisation, which was not obtained.
Anya's position: she knows the facts. If she votes or procures the purchase with knowledge, she risks liability for knowingly assisting Cass's breach of duty, and her own s.173/s.174 position is exposed. Her wish to complete before the year end is not a justification.
Ratification: s.196 allows members to approve the transaction after the event within a reasonable time, but s.223 applies again – Cass's 10% is disregarded, so Ben still controls the outcome. Ratification does not cure the s.183 offence or make good any loss to the company.
Practical answer: reversal and a fresh members' resolution are the only safe routes.