Many directors own a building or warehouse, or run a factory or shop that sells materials to the company they manage. When the company needs space or stock, the easiest answer is "just rent from me", because the director is trusted and the negotiation is quick. In legal terms, though, the director is sitting on both sides of the table. Unless the company can show it decided with full information and was not taken advantage of, even a well-meant transaction can be questioned later by shareholders, tax officers or auditors.
This guide explains what a private limited company should prepare: who approves, how the interest is disclosed, price evidence, the contract, the resolution and the tax points. It follows on from minority shareholder rights and roles and pay in a family business, because dealings with directors are often where disagreement first appears.
The core answer
A director can lease a building or sell goods to the company if three things are in place: the company consents through people who have no interest or through the shareholders, the director discloses the interest to the company and it is recorded, and there is evidence that the price and terms are ones the company could agree with an outsider. Then put the contract in writing on ordinary terms and keep the resolution and supporting papers in the company file.
The law. Section 1167 of the Civil and Commercial Code provides that the relationship between directors and the company and third parties follows the provisions on agency, unless otherwise provided, and section 805 lays down that an agent may not enter into a juristic act with itself on behalf of the principal unless the principal consents. Section 1168 imposes the directors' duty of care and bars a director from carrying on a business of the same nature that competes with the company without the consent of the general meeting. A lease of immovable property for more than three years falls under section 538. On tax, see section 65 bis (4) and sections 71 bis and 71 ter of the Revenue Code.
Our practical view. Dealing with a director is not forbidden. In many family businesses and SMEs, the director who already owns the building or the stock really does give the company the best terms. Trouble starts when nobody has written down who approved, where the price came from and what the contract says. With complete records, the same transaction becomes much easier to explain to shareholders and to the Revenue Department. The most common mistake we see is the director signing on both sides on the same day with no resolution.
Our running hypothetical: a sticky-rice and rice-snack processor in Khon Kaen, which we call "Khao Hom". It has three directors. Somchai is a director and holds 40 percent of the shares, and he owns an empty warehouse and a packaging shop that sells bags and boxes. Khao Hom wants to lease the warehouse and buy packaging from the shop.
1. Why are dealings with a director riskier than dealings with outsiders?
There are three reasons.
- Conflict of interest. A director must look after the company's interest, but here the director gains from a higher price, so the incentive points the other way.
- The agency rule. A company acts through its directors. Under section 1167 a director is treated like the company's agent, and an agent who contracts with itself on the principal's behalf needs the principal's consent under section 805.
- Who is affected. Minority shareholders, creditors and the Revenue Department all have a stake in the price the company pays or receives.
Lack of consent does not always make the contract void automatically. It depends on the facts, the articles and the circumstances, for example whether the company ratified it later. But the risks are real: the company may dispute that it is bound, the director may be liable for loss to the company if the price was unfair, and shareholders may use the point to challenge the accounts. The final answer turns on the actual documents and the court.
2. Who can give consent on the company's behalf?
Under section 805 the consent must come from the principal, which here is the company. The question is who has authority to express the company's will on this matter, which depends on the articles, any shareholders' agreement and the size of the deal.
| Situation | Who should consent | Note |
|---|---|---|
| Several directors, modest transaction | The board, with the interested director abstaining and not counted toward the quorum for that item, if the articles allow | Rely on the views of disinterested directors |
| Large or continuing transaction, or the articles require it | Shareholders' meeting | The interested director-shareholder should disclose and consider abstaining, as the articles or agreement provide |
| One director left, or every director is interested | Shareholders' meeting | One director signing on both sides is not enough |
| Company has a single shareholder | That shareholder | Make a written resolution even if the same person is the director |
| Transaction may compete with the company's business | General meeting under section 1168 | See section 3 |
One point to note: the Civil and Commercial Code does not say in terms that an interested director of a private limited company must leave the room or may not vote. The articles may say so. If they do not, it is good practice for that director to abstain and for the resolution to pass on the votes of those with no interest, which best protects both the company and the director.
In the Khao Hom example, Somchai disclosed that he owns the warehouse and the packaging shop and abstained. The other two directors considered the proposal and the price evidence. Because the annual rent was high, they also took the matter to a shareholders' meeting for a second layer of approval. For running such a meeting online, see the guide to online shareholder and board meetings.
3. Disclosing the interest, and the competing-business rule in section 1168
Disclosure. The Civil and Commercial Code does not set a fixed disclosure form for private limited companies, but whoever decides for the company must know the facts first. So the director should state in writing, or in the minutes, how the director, relatives or the director's business are interested, what the transaction is and what the price is. One disclosure is not enough for a continuing arrangement; review it every year, for example when approving the accounts.
Duty of care and competition. Section 1168 requires directors to run the company's business with the care of a person in like position, and bars them from carrying on a business of the same nature that competes with the company without the general meeting's approval. A director's business selling materials to the company is not always competition, but if the director's business sells the same kind of goods as the company to the same customers, check this point as well. The guide on an employee's side business that competes with the employer explains the same thinking from the employee side.
In short, a sale or lease with a director must pass section 805, while a director running a business that competes with the company must pass section 1168. The two can arise together.
4. Market price: what evidence should you keep?
The best protection is being able to show that the price the company pays or receives is close to what an outsider would agree. The law does not prescribe the evidence, but in practice hold at least one or two items from this table.
| Evidence | Suits | Watch for |
|---|---|---|
| Rent or property appraisal by an independent valuer | Leasing a building or land, long leases | Pick a valuer outside the director's circle |
| Price offers from other landlords or sellers | Buying goods, materials, services | Compare like for like: volume, delivery, credit |
| Comparable prices in the same area | Leasing where no valuer is used | Keep the listings or sample contracts with dates |
| Price the director charges other customers | Buying goods from the director's business | Must be similar volume and terms |
| A note of business reasons | All cases | For example location, closeness to the plant, speed of delivery |
In the hypothetical, Somchai's warehouse was offered at 40,000 baht a month. Khao Hom obtained price offers from two nearby warehouses, at about 38,000 to 45,000 baht a month for similar floor space, and kept a comparison note. For packaging bought from Somchai's shop, about 600,000 baht a year, Khao Hom asked two outside sellers for prices. The prices were close, and Somchai's shop delivered faster.
If the price is a little above market but there is an explainable reason, write the reason into the resolution. If it is well above market, do not approve it, or ask the director to adjust the price first.
5. A written lease or supply contract on ordinary terms
Do not rely on an oral arrangement just because the other party is a director. The contract should read like one with an outsider.
- Lease. State the premises, purpose, rent and due dates, deposit, term, renewal, who repairs, utilities, termination and return of the premises.
- Sale or supply contract. State the goods, price, volume, delivery date, inspection, warranty, credit and price changes.
- Length of the lease. Section 538 provides that a lease of immovable property for more than three years must be in writing and registered with the competent official; otherwise it can be enforced for only three years. If the company will invest in the building for the long term, register the lease or fit the term to this rule. The company's signatory should be another director or a person authorised by resolution, not the interested director. On authority documents, see the guide to a delegation of authority matrix.
Also deal with points that differ from an outside contract: if the director leaves office or sells the shares, does the contract continue, and when can the company end it? This ties in with the director resignation handover.
6. Tax points to know
A transaction with a director has tax effects in both directions. We cover only the general rules here, because figures and thresholds change by notification.
- Price below market without reasonable cause. Section 65 bis (4) of the Revenue Code allows the assessing officer to adjust the price towards market price where property is transferred or services are provided below market price without reasonable cause, for example if the company sells goods to the director, or lets the director use its assets, at too low a price.
- Price above market. Rent or a purchase price higher than an ordinary business would pay may be questioned as not being an expense for the company's profit-making. Section 65 ter of the Revenue Code lists prohibited expenses and should be checked alongside.
- Related-party transfer pricing. Sections 71 bis and 71 ter set rules on transfer pricing and on disclosing transactions with related parties. A company that meets the criteria must file the disclosure form set by the Revenue Department, and the criteria depend on income and the current notification. Check with the Revenue Department or your bookkeeper before the accounts are filed.
- Related taxes. Rent and sales may involve value added tax, withholding tax and the director's own income tax as lessor or seller. Check by type of lessor or seller and by the documents issued, for example a tax invoice if the director is VAT-registered.
Tax does not mean dealings with directors cannot be done. The market-price evidence in section 4 works twice: it protects the director against shareholders, and it explains the price to the assessing officer.
7. Minority shareholders and other kinds of company
Minority shareholders. Shareholders outside management watch dealings with directors closely, because money paid to a director reduces the profit available for dividends. Their rights to inspect and follow up are covered in the guide on minority shareholder rights. To cut down disputes, tell every shareholder about the transaction, with the price evidence, at the start rather than waiting to be asked.
Transactions without approval. The company may ratify later, but the disinterested people should consider it with full reasons recorded, and it should not become the usual route.
Public and listed companies. This guide focuses on private limited companies. A public limited company is subject to the Public Limited Companies Act B.E. 2535, and a listed company has stricter connected-transaction rules under the securities law and the notifications of the SEC and the stock exchange, covering both disclosure and approval. If your company is in that group, check the current notifications before the transaction. For internal controls that help prevent improper payments to related persons, see internal controls against bribery.
8. A sample board resolution
This is a starting template. Adapt it to your articles and facts.
Minutes of the Board of Directors, Khao Hom Co., Ltd., meeting no. ____/____
Date ____ Time ____ Venue/channel ____
Present: Directors ____ (Chair), ____ ; abstaining/not taking part in the item: Mr Somchai ____
Agenda: Considering the lease of a warehouse and the purchase of packaging from a director's businesses
1) Mr Somchai informed the meeting that he owns warehouse no. ____ and owns the shop ____, which sells the packaging, that he is therefore interested, and that he abstains on this item.
2) The meeting considered the supporting papers: a rent appraisal report / price offers from ____ other landlords and sellers, and a price comparison note.
3) The meeting found that the rent of ____ baht per month and the goods price under offer no. ____ are close to market price and benefit the company because ____.
Resolution: To give consent under section 805 of the Civil and Commercial Code for the company to enter into a lease for a term of ____ years and a sale and purchase contract in the form of the attached drafts.
To authorise Director ____ to sign the contracts for the company.
To put the matter to a shareholders' meeting for approval [if the articles or the value require it].
Voting: for ____ against ____ abstained ____
Signed ____ (Chair) ____ (Minute taker)
Attachments: 1) Draft contracts 2) Appraisal report / price offers 3) Price comparison note 4) Director's notice of interest
If the matter involves a change that must be notified to the registrar, such as a new director replacing one, check the steps in the guide to company changes after registration.
9. Checklist of supporting documents
Before deciding
- The director gives written notice of interest, naming the business and relationship
- Check the articles for who can approve and whether a shareholders' meeting is needed
- Check whether the transaction competes with the company's business under section 1168
Price evidence and reasons
- A rent appraisal report, or price offers from at least two or three others
- A dated comparison note of prices and terms
- A note of the business reasons for choosing the director's business
Approval
- Minutes recording that the interested director abstained
- A resolution of consent stating price, term and authorised signatory
- A shareholders' resolution where the articles or the value require it
Contract and legal papers
- A written lease or sale contract on ordinary terms
- The lease registered if it runs for more than three years, under section 538
- Another director or an authorised person signs for the company
Tax and accounts
- Ask your bookkeeper about value added tax, withholding tax and related-party disclosure
- Keep tax invoices, receipts and proof of payment
- Review continuing transactions and the disclosure of interest once a year
Further reading
- Minority shareholder rights — when other shareholders question dealings with a director
- Roles and pay in a family business — decision rules when relatives are both shareholders and directors
- Online shareholder and board meetings — holding the meeting and keeping the resolution in order
- Delegation of authority matrix — setting approval limits clearly
- Internal controls against bribery — controlling payments to related persons
- Employee side business that competes with the employer — the conflict of interest on the employee side
- Director resignation handover checklist — contracts with a director after the director leaves
A transaction with a director can be done if disinterested people approve it for the company, the director discloses the interest, the price is backed by evidence, and the contract and resolution are kept on file.
We help review and prepare draft resolutions, notices of interest, lease and supply contracts, check the articles for who can approve, and prepare papers for the meeting. For an initial consultation, call +66 92 254 2045 or send us the details. See also corporate secretarial work and family business.
This guide is published by Suwanvara Law Firm — a Khon Kaen law firm established in 1986. General information only, not legal advice on a specific matter.
