Companies Act 2006The UK Companies Act 2006 will make it quicker and easier to acquire corporate real estate, writes Melvin Pedro
Yes, it's true. In an amazing about turn the UK Government has introduced legislation to facilitate tax saving schemes for property transactions. Well, that may not be quite how HM Treasury would describe it but the Companies Act 2006 received Royal Assent in December 2006. The Act will be brought into force in stages between now and October 2008 and it will simplify the process for acquiring a company that owns a property (usually called a special purpose vehicle or SPV). It will also remove many of the restrictions that made ownership of a SPV company a much greater burden than the ownership of a property.
The most common reason for acquiring the company rather than the property direct is that the stamp duty payable on the acquisition of the shares in a company is 0.5 per cent of the consideration in contrast to the stamp duty land tax payable on the acquisition of a property which can be 4 per cent.
The biggest impact of the 2006 Act in this area will be to reduce the complexities that arise in financing the purchase through a SPV company.
Prior to the introduction of the 2006 Act, if the purchaser of a company wished to use the assets of a company, whose shares they were acquiring, as security for a loan to purchase those shares (which was usually the case) it was necessary to go through the so called "whitewash" procedure under Section 155 of the Companies Act 1985.
Indeed if the company granted such security without going through the right procedure, the security would be unenforceable and a criminal offence would be committed.
The main problem with the whitewash procedure was that, prior to the security being granted, the directors of the company being acquired had to make a statutory declaration that the company would be able to pay its debts (supported by a certificate to that effect from the company's auditors).
The company also had to have net assets. This required the company to prepare an up to date balance sheet and a comprehensive cash flow forecast.
The 2006 Act will now permit companies to grant such security without needing to go through this procedure. In effect, the granting of security to financiers will be no more complicated for a company purchase than it is for a property purchase.
The 2006 Act will also make it easier to extract the property and other assets from the SPV company after the acquisition. Prior to the Act, if a purchaser wished to transfer the property from the company to himself (or to another company owned by the purchaser) the transfer would need to be at market value. It will now be possible for the transfer to be at book value which, in many of these purchases, will be substantially lower than the market value.
The relaxation of the rules on the giving of financial assistance and the making of loans to directors will help a company with cash resources to lend that money directly to its shareholders.
Prior to the 2006 Act, it was not possible for a company, other than in very limited circumstances, to lend more than £5,000 (€7,329) to any shareholder who was also a director (as is usually the case in such transactions).
Now there is no cap on the amount the company can lend to its shareholder directors, subject to shareholder approval. However it will continue to be necessary for directors to consider whether such loans are in the best interests of the company as part of their fiduciary duties as directors. The management of a SPV company is greatly simplified under the 2006 Act which will not only make it cheaper to manage the company but also make it easier to operate.
Many of the administrative formalities that applied to all companies before the 2006 Act will now only be required by public companies. Private companies (most companies involved in transactions such as this are inevitably private) will no longer need a company secretary, will not be required to hold an annual general meeting and will be able to take nearly all decisions by written resolution (the only exceptions are resolutions to remove auditors or directors).
Whilst the 2006 Act has not removed all the problems associated with a corporate rather than a property purchase (in particular inheriting all the liabilities of the company, whether they relate to the property or not), it has made the path smoother so that the trend towards "corporate real estate" looks like it is here to stay. So SPV's do now glisten as long as you are careful and at least until HM Treasury decide to have another attack on the purchase of special purpose vehicles.
Melvin Pedro is a corporate partner at Manches LLP, the London specialist property lawyers
