If the company enters into a ‘substantial property transaction’ with a director of the company (or someone connected to a director such as a member of a director’s family) then:
- The transaction is voidable by the company; and
- The director or the connected person is liable to account to the company for any gain he makes on the transaction; and
- The director or the connected person is liable to indemnify the company for any loss it suffers as a result of the transaction.
As the old sole trader is likely to be a director of the new company this could apply in the context of a sole trader to limited company business transfer.
A transaction is a ‘substantial’ one if it exceeds:
- £100,000 in value; or
- Exceeds 10% of the company’s asset value and is more than £5000.
If the value of the sole trader business being purchased by the company is more than £100,000 then the shareholders of the company should formally approve the purchase of the business.
If the value of the business is £5000 or less then there is no need.
Practically any value over £5000 is likely to be more than 10% of the company’s asset value as it is usually a start up company formed specifically for the purpose of buying the sole traderâs business and the company is therefore unlikely to have any real value prior to acquiring the sole traderâs business.