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Today, many blocks of flats are owned by companies made up of leaseholders, many of which have been established by the process known as ‘collective enfranchisement’, a group right to purchase the freehold and become the new freeholders. A management-only company can be established two different ways:

  1. The ‘Right to Manage’ where the company replaces the managing agent with one of their own choosing but the company doesn’t own the freehold and;
  2. Under the most common form of management structure for new-build blocks of flats, the ‘tri-party’ lease. This is where leaseholders have a share in the management company and have more of a say in how their building is run. However the developers keep the freehold.

Companies Limited by Shares or Guarantee?

The most common type of company is limited by shares and has its own clear and separate identity. It can own property, (such as money, land, intellectual property etc) and it can also undertake contracts such as employment contracts and contracts for buying goods.

Like a company limited by shares, a company limited by guarantee also has its own clear and separate legal identity but it can’t be formed by share capital under s5 of the Companies Act 2006. As it doesn’t trade it is unsuitable for commercial enterprise so is more likely to be used for RMC’s formed under ‘right to manage’. It is also less likely to become insolvent and is controlled by membership. It’s members can be issued a non-transferable certificate of membership (which automatically lapses when a flat is sold) making them guarantors.

Under ‘limited liability’ both types of company are responsible for their own debts so when they are incurred in the course of its business, the responsibility of the Directors (along with shareholders and company members) 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. This is because their acts are undertaken as agents for the company so their stake is usually for a fixed sum of £1. So, should the companies be wound up whilst people are still shareholders or members (or within one year of their ceasing to be so) their personal liability is guaranteed to that specific amount.

However, there are certain circumstances where liability may be imposed by the court, particularly in respect of wrongful or fraudulent trading. 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.

Such circumstances tend to arise when the company has become, or is likely to become insolvent.

MEMORANDUM AND ARTICLES OF ASSOCIATION

Whilst the legal obligations of the company are governed by company law, at the heart of all companies lies the Memorandum and Articles of Association.

The Memorandum will state the following:

  1. The company name;
  2. The company type;
  3. If the company has shares, its share capital and the value of each share (unless the company is limited by guarantee);
  4. It’s objectives (what it will do). Since the mid 1980s the objects clauses have been simplified and expressed to be for flat management or commercial objectives;
  5. Shareholder names;
  6. Where the registered office is situated.
  7. A statement of limited liability to warn anybody dealing with the company that the liability of its shareholders is capped, normally to the value of the authorised capital.

The Articles set out the rules for running the company’s internal affairs and every company formed under the Companies Act 2006 will have them. They are designed to give a series of checks and balances between shareholders and directors such as:

  1. The issuing and transferring of shares;
  2. The calling of general meetings, procedures and members voting rights;
  3. The calling of Directors’ meetings, voting at board meetings, the disclosure of personal interests and the process for appointing and removing Directors;
  4. An indemnity which means that directors and other officers will be indemnified if, through their actions, the company makes mistakes.

Note: Companies registered from 1st October 2009 (or adopting new articles from that date), do not have a traditional memorandum of association but new Model Articles that simplify the way a company is run and which is a replacement of Table A. Provisions that were in the memorandum are now to be treated as if they were provisions of the articles. Companies registered before this date can continue to run under their old memorandum and articles, but need to be aware that these do not show current legislation under the Companies Act 2006.

Before registering an RMC with Companies House, form INO1 must be completed which requires the following;

  1. The proposed company name;
  2. The UK address of the registered office (which doesn’t have to be within the block of flats but it must not be fictitious;
  3. A list of names of the proposed officers, Directors(s) and Company Secretary.

Changing the Articles

Whilst the company can set up its own rules, because they are legally binding on the company and its shareholders/members they cannot include rules that are against the law. Having said that, the majority of companies, especially small ones, tend to rely on model articles instead of drawing up their own. The company’s articles are not set in stone and sometimes the need to change them can arise for a number of reasons.

Any change must be in the genuine best interests of the company, not just designed to meet the needs of some members. While this doesn’t mean that every member must agree to a change to the articles, any change cannot be used by a majority to discriminate against the minority or deprive minority shareholders/members of their statutory rights.
Retrospective changes need to be both legal and fair. In particular, s25 of the Companies Act 2006 (effect of alteration of articles on company’s members) does not allow the company to insert retrospective provisions that need members to increase their shareholdings or give further funds to the company without the members specific agreement in writing.

The Articles also can’t be changed to remove the ability to make further changes to them in future. Having said that, there may be conditions attached to making alterations such as a contractual arrangement (like a shareholders’ agreement) for example which may effectively restrict the ways in which the articles can be amended.

Once a legitimate need to update the articles of association has been identified, this change can be implemented by:

  1. Amending the wording of one or more clauses in the existing articles;
  2. Adding in new or removing clauses from the existing articles; or
  3. Adopting an entirely new set of articles (completely replacing the previous set of articles).

So, who can be a company Director and what exactly does the role entail? More on this can be read here.

 

 

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