Leasehold Resident Management Companies are exactly what they say they are: companies established by, and consisting of, leaseholders and who may (or may not) own the freehold. These legal entities act as persons in their own right but because they need someone to represent them and and act on their behalf, it is the RMC Company Director(s) who take on the role. There should be more than one to ensure a balance of power but equally there should not be too many.
Under s391(2) of the Companies Act 2006 (accounting reference date and accounting reference period) when a new company is set up its Accounting Reference Date is the last day of the month in which it is registered. It starts when a) the company begins to trade or b) immediately after the end of a previous accounting period. It is this date that identifies the end of the Accounting Reference Period or financial year, which is when the company’s annual accounts are calculated and the last dates for delivering accounts to its members and to Companies House. No matter what period a company’s accounting year covers, the initial accounting year end date will be on the first anniversary of the end of the month in which it was incorporated.
Note: Under s392 of the Companies Act 2006 (alteration of accounting reference date) a company can change its accounting reference date but when such a change is made, the accounting period cannot last less than 6 months and not more than 18. The financial year ends with the Accounting Reference Date (plus or minus 7 days).
Under s386 of the Companies Act 2006 residential management companies (and this includes managing agents) are required to keep accounting records, just like commercial companies. Whilst the explanatory notes contained within the Act state that ‘accounting records is a broad term and there is no specific definition as the records may differ depending on the nature and complexity of the business’ what this basically means is that regardless of how basic or sophisticated a company is, as a general rule accounting records should include the following:
- All financial transactions i.e. money received and spent;
- Details of assets owned by the company which must be able to be disclosed at any time and with reasonable accuracy;
- It’s liabilities, i.e.debts the company owes or is owed;
- Stock the company owns at the end of the financial year;
- Stocktaking used to work out the stock figure;
- Bank statements;
- Purchase orders;
- Sales and purchase invoices.
These accounting records must be kept at the company’s registered office address (or any other place deemed suitable by the Company Directors) and under s388 of the Act must be kept for at least 6 years for public companies and at least 3 years for private companies. It is however important to note that other legal considerations, (such as tax legislation), means that companies usually need to keep the accounting records for longer periods such as when:
- They show a transaction that covers more than one of the company’s accounting periods;
- The company has bought something that it expects to last more than 6 years, like equipment or machinery;
- The Company Tax Return was sent late;
- HMRC have started a compliance check into the Company Tax Return.
Wherever they are held they must be open to inspection by the company Directors and officers at any time.
COMPANIES LIMITED BY SHARES
Most RMC’s are companies limited by shares and once paid for, each flat owner will own just one share each of a nominal value (face value) and become a member of the RMC with voting rights. Leaseholders are protected from personal liability by the amount they pay for their share should the company fail. When a flat is sold then the share will automatically be transferred to the new purchaser who automatically becomes a company member.
A company of this type is able to distribute any profit to its members but if it does then it is important to be aware that both the company and its members would be liable to pay tax.
COMPANIES LIMITED BY GUARANTEE
The other type of RMC Company is that of being limited by guarantee. Right to Manage companies are constructed in this way because it was thought to be 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. This renders 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.
Like a company limited by shares, a guarantee company has a clear legal identity that allows it to purchase and own property in its own name and undertake contracts such as employment contracts and contracts for the purchase of goods. Again it is the company that is responsible for its debts, not the people who run it because they are also protected from personal liability, limited to the guarantee amount set out in the company’s Articles. This is typically just £1 so should the company be wound up whilst people are still members (or within one year of their ceasing to be a member) their personal liability is guaranteed to that specific amount.
There are however exceptions:
- If the memorandum states their liabilities to be unlimited;
- If they have been guilty of acting in wrongful manner;
- If directors exceed the powers conferred on them they can be liable to recompense from the company for any loss incurred;
- If a director gives a personal guarantee;
- If any director enters into a contract in their own name rather than “for and on behalf of”;
- If a director misleads a supplier as to whom the true customer is to be;
- Issues a cheque, upon which the company name is not clearly stated, and which the bank refuses to honour;
- If found guilty of fraudulent or wrongful trading, the court may instruct a director or shadow director to contribute to the assets;
- 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.
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.
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.