Limited By Shares or Guarantee
Most Resident Management Companies are limited by shares as this is the most common choice of company formation. The individual share price can be of any value but the usual nominal value (very small and far below the real value or cost) of a single share will be £1 and should be limited to one share for each unit in the property. Where a unit is held in joint names, a single share in the company will be held in those joint names. The company’s articles provide that shares may be held only by someone who owns a unit in the property and that anyone selling their unit must transfer their share to the person buying it. No other shares may be issued.
Because of ‘limited liability’ the company exists as a separate legal ‘person’, disconnected from the shareholders and the directors. Just like a real person, the company can own property (such as money, land, intellectual property etc) and undertake contracts such as employment contracts and contracts for buying goods. It will however be the Company Director(s) who exercise all powers on its behalf. More on their role can be read here.
The company is also be responsible for its own debts under ‘limited liability’. So, when debts are incurred in the course of its business, the liability of the Directors and shareholders is ‘limited’ in that a) they are not responsible for company debts and b) their liability extends only to the ‘stake’ that they have in it.
Limited by Guarantee
Like a company limited by shares, a guarantee company also has a clear and separate legal identity with the Company Directors exrcising all powers on its behalf but the difference is that it can’t be formed by share capital under s5 of the Companies Act 2006 making it unsuitable for commercial enterprise but making it less likely to become insolvent.
Without shares there can be no shareholders. Instead, the company will have ‘members’, each of whom can be issued a non-transferable certificate of membership which makes them guarantors with ‘limited’ liability for the company’s debts, usually up to a fixed sum of £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 a wrongful way;
- If directors exceed the powers conferred on them by the company Articles 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 and not “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.
Another difference is that a guarantee company is only ‘controlled’ because 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 profit distribution (should it make any) by the Companies Act (or any other law), or it chooses to keep 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.