Setting Up and Running a Resident Management Company
The RMC is a company comprised of leaseholders formed through the following:
- A tri-party lease,
- Collective enfranchisement (a group right to purchase the freehold);
- A Right to manage company (where leaseholders can choose their own managing agent;
- Compulsory acquisition where the freeholder has failed to meet its obligtions and the freehold has been awarded to the leaseholders.
The form used for registering a new company at Companies House is that of Form IN01 and its completion can be carried out by a solicitor, a company formation agent or an accountant. The form requires the following information:
- The proposed company name;
- Company type;
- Principle business activity;
- Registered office address; (which doesn’t have to that of the building being managed);
- Memorandum and Articles of Association (see below);
- Proposed officers;
- Company secretary details;
- Director(s) details;
- Statement of capital;
- Statement of guarantee;
- People with significant control (introduced in later legislation).
The form can be sent online or by posting a hard copy to Companies House.
Accounting Reference Date
This is the term used by Companies House to refer to the last day of the company’s financial year.
Under s391(2) of the Companies Act 2006 (accounting reference date and accounting reference period) the accounting reference date is the last day of the month in which the company is registered. It starts when a) the company begins to trade or b) immediately after the end of a previous accounting period. It is this date that identifies the end of the Accounting Reference Period or financial year, which is when the company’s annual accounts are calculated and the last dates for delivering accounts to its members and to Companies House. No matter what period a company’s accounting year covers, the initial accounting year-end date will be on the first anniversary of the end of the month in which it was incorporated.
Note: Under s392 of the Companies Act 2006 (alteration of accounting reference date) a company can change its accounting reference date but when such a change is made, the accounting period cannot last less than 6 months and not more than 18. The financial year ends with the Accounting Reference Date (plus or minus 7 days).
Limited by Shares or Guarantee
Historically, an RMC is a company limited by shares although a company establishd by the process of right to manage is usually limited by guarantee as that was considered to be the most appropriate vehicle when the right was created. The certificate will state:
- The name and registered number of the company;
- The date of its incorporation;
- Whether it is a limited or unlimited company, and if it is limited whether it is limited by shares or limited by guarantee;
- Whether it is a private or a public company; and
- Whether the company’s registered office is located in England and Wales, Wales, Scotland or in Northern Ireland..
Both types of company have a clear and separate legal identity and under ‘limited liability’ both 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.
There are however exceptions to personal liability being guaranteed to a fixed sum:
- If the memorandum states their liabilities to be unlimited;
- 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.
- 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 area where personal liability may not guaranteed to a fixed sum is wrongful or fraudulent trading:
- Fraudulent trading is where any business of the company has been carried on with intent to defraud creditors or 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.
If found guilty of either, the court may instruct a director or shadow director to contribute to the assets.
If the form is completed correctly and the name of the company is acceptable then a Certificate of Corporation signed by the registrar or authenticated by the registrar’s official seal.is issued, either through the post or online depending on how they were filed.
People With Significant Control
Companies registered on or after June 30th 2016 have to include information about People with Significant Control (PSCs) on their incorporation application form. This information should then be updated or confirmed annually when filing a confirmation statement under Part 7 of the Small Business, Enterprise and Employment Act 2015 (Companies: Transparency)
The PSC register rules apply to companies limited by guarantee, LLPs and (subject to special rules) limited partnerships as well as to companies limited by shares.
More on PSC’s can be read here.
COMPANY MEMORANDUM AND ARTICLES
The objective of the RMC is to manage and maintain the common areas and 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:
- The company name;
- The company type;
- If the company has shares, its share capital and the value of each share (unless the company is limited by guarantee);
- 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;
- Shareholder names;
- Where the registered office is situated.
- 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:
- The issuing and transferring of share certificates, the share class and the transfer of shares;
- The calling of Directors’ meetings, voting at board meetings, the disclosure of personal interests and the process for appointing and removing Directors;
- The powers and responsibilities of the company Directors;
- An indemnity which means that directors and other officers will be indemnified if, through their actions, the company makes mistakes.
Changing the Company 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:
- Amending the wording of one or more clauses in the existing articles;
- Adding in new or removing clauses from the existing articles; or
- Adopting an entirely new set of articles (completely replacing the previous set of articles).
COMPANY RECORDS AND SECRETARY
Company records are generally required to be kept at the company’s registered office or SAIL (single alternative inspection location). They include information about the company itself, such as:
- Names of directors and their addresses;
- Names of shareholders;
- Records of Director(s) meetings;
- The results of any shareholder votes or resolutions;
- Names of members (if the company is limited by guarantee);
- Records of members’ resolution and meetings;
- Name of the Company Secretary;
- A register of ‘people with significant control’ (i.e. details of any one person who controls more than 25% of voting shares,and even if there is no one person with significant control a record still needs to be kept);
The role of the Company Secretary was removed from statute on 6th April 2008, so the requirement for private limited companies to have one became optional.
There are no specific qualifications needed to become a Company Secretary but the role is a very responsible one and includes the following:
- Acting as registered office;
- Secure holding of and ongoing maintenance of the statutory books and registers;
- Receiving and re-directing post received at this address;
- Monitoring official correspondence received from Companies House to ensure compliance with statutory deadlines and any other matter that may arise;
- Preparing and filing the Company’s confirmation statement each year; and
- Filing the Company’s accounts.
Note: It is still widely recommended that leasehold resident management companies retain them otherwise their duties would become the responsibility of the company.
THE ROLE OF THE COMPANY DIRECTOR(S)
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.
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 the statutory accounts of the company.
So whilst adherence to the codes are necessary they are not legally binding. This makes breaching them a) not a criminal offence and b) doesn’t create any civil liability.
They can however be used as evidence in court and tribunal proceedings but in essence are little more than best practice guides.
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.
So how can RMC Directors 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.