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The next stage is that of forming an RTM company because under s73 of the Commonhold and Leasehold Reform Act 2002 it is the company that is used as the vehicle to exercise the right to manage.

At this stage of the process not all of the qualifying leasehold members are required – just enough to provide a minimum of 2 directors and a company secretary. So, from our block, five qualifying leaseholders attended a meeting with three of those five agreeing to act in the capacity of Directors (2) and Secretary (1). The Directors were formally appointed by Board resolution and their details entered onto application form for registering a new company (a Form IN01 which replaced the Form 10 on 1st October 2009), signed and filed with the Registrar of Company at Companies House where the company was also then registered.

Unlike other RMC’s, that of a right to manage company is limited by guarantee as that was considered the most appropriate vehicle when the right was created. Companies who use it do not trade and it can’t be formed by share capital under s5 of the Companies Act 2006, rendering it unsuitable for commercial enterprise and therefore less likely to become insolvent. The incentive for members to become involved is commitment to the company’s objectives rather than profit as with shareholder companies.

The company can give each member a non-transferable certificate of membership which makes them guarantors and the company must have one or more members who will be entitled to attend general meetings and vote (subject to any special provisions in the company’s articles). This is unlike a company limited by shares, because a guarantee company is only controlled as there are no shares or other security in the company that can be sold to someone else. The certificate of membership will automatically lapse on the sale of a flat.

Like a company limited by shares, a guarantee company has a clear legal identity that allows it to:

  1. Purchase and own property in its own name;
  2. Undertake contracts such as employment contracts and contracts for the purchase of goods. It is the company that is responsible for its debts, not the people who run it because they are protected from personal liability. This is limited to the amount of the guarantee set out in the company’s Articles, which is typically just £1.

Therefore the statement of liability of each member of the company should it be wound up whilst they are still members (or within one year of their ceasing to be a member) is guaranteed to that specific amount.

There are however exceptions:

  1. If the memorandum states their liabilities to be unlimited;
  2. If they have been guilty of acting in wrongful manner;
  3. If directors exceed the powers conferred on them they can be liable to recompense from the company for any loss incurred;
  4. If a director gives a personal guarantee;
  5. If any director enters into a contract in their own name rather than “for and on behalf of”;
  6. If a director misleads a supplier as to whom the true customer is to be;
  7. Issues a cheque, upon which the company name is not clearly stated, and which the bank refuses to honour;
  8. If found guilty of fraudulent or wrongful trading, the court may instruct a director or shadow director to contribute to the assets;
  9. A person who has been disqualified from acting as a director under the Directors Disqualification Act 1986, or another person who knowingly acts under instruction from that person.

Profit Distribution

Whilst the company is not prohibited from distributing its profits (should it make any) by the Companies Act (or any other law), or it chooses to retain them for use elsewhere, it is commonplace for restrictions to be put on profit distribution in the company’s Articles. These will not only apply to any profits while the company is running but also to the distribution of assets (after paying creditors) should the company be wound up. Sometimes the restrictions are also reinforced by the prevention of payment of salaries or fees to the directors but not all the time.

The next stage of the process is the other qualifying leaseholders to become part of the company, via the Notice of Participation.

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