The Role of the RMC Director(s)
Unlike their commercial counterparts, RMC Directors are usually unpaid volunteers but despite this, they are also subjected to the same penalties for failure to adhere to their legal and fiduciary duties under common law. They can be prosecuted under both criminal law and health and safety law such as under the Corporate Manslaughter Act of 2007, and the Health & Safety Offences Act 2008 which 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.
RMC Directors are also bound by fiduciary duties are those which involve trust and 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 and 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.
As if all that were not daunting enough, RMC Directors also have to be familiar with the following:
- Specific block management legislation;
- The leases, (which ideally should be reasonably uniform throughout the block;
- The RICS Service Charge Residential Management Code and Additional Advice to Landlords, Leaseholders and Agents;
- The ICAEW Tech 03/11 Residential Service Charge Accounts as they will be responsible for signing off both the service charge accounts (monies paid by leaseholders and held in trust) and filing the statutory accounts of the company within 9 months of the accounting reference date.
There are strict deadlines imposed for filing the statutory accounts and they are only considered delivered when they are actually received at Companies House in an acceptable format. A reminder is sent every year to the registered office and if deadlines are missed then the company will receive an automatic financial penalty even if the accounts are late by just one day. Even sending the accounts too close to a deadline that expires during a bank holiday will not be acceptable. If there are any reasons for the accounts to be late it might be possible to apply for an extension in writing before the deadline but this will apply only in situations that are beyond the control of the RMC Directors and their professional advisors. If there is persistent failure to file accounts (and several letters will be sent by Companies House giving notice of the failure to file), the company may be struck off the Register of Companies. Once this happens the all the assets of the company will become the property of the Crown and the company will no longer exist. In the case of a RMC the asset will mean the building of which each member owns a flat! Below are some of the reasons that are used in an attempt justify not having to pay a penalty for late or no filing:
- The accounts were delayed or lost in the post;
- The company is dormant;
- The company is in financial difficulties and can’t afford to pay;
- The accounts were received by Companies House on time but were rejected;
- Another director is responsible for preparing the accounts;
- The accountant was ill;
- These are the first accounts;
- The company is not familiar with the filing requirements.
The penalty for missing the filing deadline (for private limited companies) is:
- Up to 1 month £150;
- 1 to 3 months £375;
- 3 to 6 months £750;
- More than 6 months £1,500
Most RMC’s (and definitely Right to Manage Companies) use the services of a managing agent, due to the logistics of self-managing anything larger than 4 flats or so but even unpaid volunteer Directors must resist the temptation to sit back and let them get on with it. Why? Because they actually employ them! They must therefore 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.
TYPES OF 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.
WHO CAN BE AN RMC DIRECTOR?
Anyone can become an RMC Director unless they have been disqualified under the Company Director Disqualification Act 1986, where the courts may disqualify persons who are found unfit to act as Directors under various circumstances:
- Conviction of criminal offences in relation to companies;
- Responsibility for wrongful or fraudulent trading in the insolvent liquidation of a company;
- Repeated defaults in filing documents with, or reporting matters to, the Registrar of Companies;
- Being an undischarged bankrupt.
Disqualification can be for periods up to 15 years during which time a person cannot act as a director without leave from the court.
If a person is not listed on the Disqualified Directors Register this can mean one of the following three things:
- The person is not and has not been disqualified;
- The person was disqualified in the past but the disqualification order has since lapsed (a register of lapsed disqualifications is not maintained);
- The person is disqualified but Companies House have not yet received official notification from the courts.
There is no maximum age limit but s157 of the Companies Act 2006 (minimum age for appointment of director) imposes a 16-year old minimum and s159 of the same Act (existing under age-directors) states that directorship ceases where a company has an under-age director on the implementation date (1st October 2008). Also there are no statutory limitations as to nationality or residence so whilst it is possible to merge these into the company Articles it rarely happens. It is unusual for modern company articles to impose a share qualification but if they do then the shares must be acquired within two months of the Directorship appointment.
So with all the responsibilities that RMC Directors take on, how can they protect themselves against someone making a claim against them? The answer is that of having Directors and Officers Liability Insurance and more on this can be read here.