The Resident Management Company is a legal entity which acts as a person in its own right and it is the Company Director(s) who exercise all powers on its behalf.
The most significant difference between Directors of commercial companies and those of an RMC is that Directors of the latter are voluntary and not usually paid! They will nevertheless take on a great amount of legal and fiduciary duties under common law, which have legal force, the latter of which involve trust.
The precedence created is that directors ‘are bound to use fair and reasonable diligence in the management of their company’s affairs and to act honestly’ implicitly to the benefit of the company’s shareholders, creditors and employees. In other words, the directors will act in the best interest of all concerned parties.
These duties include:
- Prohibiting loans to directors;
- Restricting other credit to directors;
- Disclosing details of loans and other transactions in which a director has an interest in the accounts.
Generally speaking, the directors incur no personal liability as all their acts are undertaken as agents for the company. However, there are certain circumstances where liability may be imposed by the court, particularly in respect of wrongful or fraudulent trading. Such circumstances tend to arise when the company has become, or is likely to become insolvent.
Fraudulent trading is where any business of the company has been carried on with intent to defraud creditors or for any fraudulent purpose; this includes where debts have been incurred by a company knowing that they cannot be paid.
Wrongful trading is where a company has gone into insolvent liquidation and it appears to the court that any person who has been a director of the company knew or ought to have known that this would occur and failed to take all reasonable steps to minimise the loss to the creditors. Unlike with fraudulent trading, there is no need to prove fraudulent intent on the behalf of the directors in order for them to be held liable for it.
TYPES OF COMPANY DIRECTOR
There are three types of Company Director:
1: De Jure Director: This type of Director is formally appointed and registered at Companies House. They owe the fiduciary duties of good faith and loyalty as well as the common law duties to exercise skill and care to the company/shareholders. They also owe statutory duties including those set out in the Companies Act 2006, such as a) the duty to act within their powers, b) the duty to promote the success of the company, and c) the duty to avoid conflicts of interest.
2: De Facto Director: This type of Director is any person occupying the position of a director, (by whatever name called). They will owe fiduciary duties as well as duties imposed by statute because de facto directors come under the general definition of a director in s250 of the Companies Act 2006.
It is however not always clear whether or not someone is a de facto director but in the case of Smithton Ltd v Naggar and others , it was held that one of the key factors in determining whether someone was a de facto director was a) whether that person was part of the corporate governance system of the company and b) whether he assumed the status and function of a director so as to make himself responsible as if he were a director. The judge also gave further guidance on the matter, namely:
- That a job title will not be a deciding factor – the court will also look at what the director actually did;
- It is not a defence to show that the director, in good faith, thought he was not acting as a director. This question will be determined objectively;
- Any acts done by the director should be looked at in the relevant context;
- A relevant factor will be whether the company considered the individual to be a director and held them out as such, and whether third parties considered the individual to be a director;
- The fact that a person is consulted about directorial decisions, or their approval is sought on such decisions, does not in general make them a director because they are not making the decision.
3: Shadow Director: This type of Director is someone upon who’s instructions or directions are acted upon by the Director(s) person and defined in s251 of the Companies Act 2006. Whilst there are some specific requirements in this Act, which state the shadow directors are liable in the same way as de jure directors, (such as regarding wrongful trading, director disqualification and the declaration of interest in existing transactions), whether they owed fiduciary duties was establised in the case of Vivendi SA and anor v Richards and anor . Here the High Court held that a shadow director will typically owe fiduciary duties in relation at least to the directions or instructions that he gives to the de jure directors. More particularly, the court held that a shadow director will normally owe the duty of good faith (or loyalty) when giving such directions or instructions. The court also stated that a person who gives directions or instructions to a company’s de jure directors in the belief that they will be acted on, can fairly be described as assuming responsibility for the company’s affairs, at least as regards the directions or instructions that person gives.
So, if a person comes within the definition of a shadow director, they should look to act in accordance with the duties imposed on de jure directors, as failure to do so may result in liability.
EMPLOYING MANAGING AGENTS
Unless they self manage, RMC’s will invariably use the services of a managing agent. They will however need to resist the temptation to sit back and let them get on with it because they actually employ them. They must also be prepared to act as any other commercial employer would which includes questioning any action taken on their behalf by the agent that they do not understand.
So, in order to instruct effectively Directors will be required to be familiar with the legislation specific to block management, and the leases (hopefully they should be uniform throughout the block), and abide by the RICS Service Charge Residential Management Code and Additional Advice to Landlords, Leaseholders and Agents (3rd Edition). This Code was initially approved by the Secretary of State under s87(7) of the Leasehold Reform, Housing and Urban Development Act 1993 with the 3rd edition of the Code coming into effect as of 1st June 2016 under The Approval of Code of Management Practice (Residential Management) (Service Charges) (England) Order 2016.
The Code is however not legally binding and so breaching it is not a criminal offence, nor does it create any civil liability. There are also no routine checks made on agents to ensure they are abiding by the Code so unless their contents can be used in evidence in court and tribunal proceedings, where freeholders or managers have failed to comply with them, they are in reality ‘best practice’ guides.
RMC Directors will also be required to abide by the best practice guide of the ICAEW Tech 03/11 Residential Service Charge Accounts as they will be responsible for both the service charge accounts (monies paid by leaseholders and held in trust) and the statutory accounts of the company which is money generated from share capital or membership subscriptions. If it owns the freehold it can also expect income from ground rent or premiums from lease extensions. These funds are taxable at the rate for corporation tax.
Note: Service charge contributions are not assets of the company.
There are mixed opinions as to whether both accounts should be combined but Tech 03/11 states that they should be prepared separately. The key reason is that service charge accounts are required to follow the terms of the lease making them incompatible with the statutory requirements laid down by Companies House.
It is clear that volunteering to become an RMC Director is a role that should be given careful consideration due to the responsibilities that will be taken on.
For example, under the Corporate Manslaughter Act of 2007, not only can Resident Management Companies be prosecuted under criminal law for serious breaches of health and safety law but the Health & Safety Offences Act 2008 raised the maximum fine for offences in the lower courts from £5,000 to £20,000. It also increased the number of offences for which an individual can be imprisoned. It is therefore vitally important for RMC Directors to be aware that it is they who keep overall responsibility for the health and safety of their block, regardless of whether they delegate to others or not.
Failure to prepare and keep records, maintain the company registers or file the accounts can result in the Directors being held liable for penalties, criminal prosecution and possible disqualification, even if they use a company secretary. But how can RMC Directors protect themselves against someone making a claim against them? The answer is that of Directors and Officers Liability Insurance and more on this can be read here in the excellent overview of the subject by Laura Severn, of award-winning Brady Solicitors