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. All are formally appointed by Board resolution and their details entered onto a Form IN01 which is an application form for registering a new company (and which replaced the Form 10 on 1st October 2009). This form is signed and filed with the Registrar of Companies at Companies House and the company is also registered as a company limited by guarantee. This is because this type of company is thought to be the most apropriate vehicle when the right was created and companies who use it don’t trade and it can’t be formed by share capital under 5 of the Companies Act 2006. This renders it unsuitable for commercial enterprise, and making it 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 company limited by guarantee also has its own clear and separate legal identity. It is controlled by membership, and it’s members can be issued a non-transferable certificate of membership (which automatically lapses when the unit is sold). This makes making them guarantors, again with ‘limited’ liability for the company’s debts and 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.

Details of Membership

  1. Unit holders apply to become members (membership form needed);
  2. Directors pass (written) resolution to admit unit holder as member. An entry is made in the register of members of the date of cessation of membership and the name of the new member;
  3. No share certificates are issued but a certificate of membership could be, which would be surrendered for cancellation on sale of the unit. However, there is no legal requirement for a certificate and as the member’s name would have been removed from the register the certificate has no value;
  4. Usually one member has one vote. Not all articles are clear on this and problems could arise should one member own two units.
  5. No requirement to submit details of members with annual return (which has been abolished and replaced with the confirmation statement) to Companies House.

There are however exceptions to personal liabiliaty being guaranteed to a fixed sum:

  1. If the memorandum states their liabilities to be unlimited;
  2. If they have been guilty of acting in a wrongful way;
  3. 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;
  4. If a director gives a personal guarantee;
  5. If any director enters into a contract in their own name and not “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 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.




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