Directors . . .are you taking your responsibilities seriously?

Both right to manage (RTM) and Resident’s Management companies are limited liability companies and therefore the directors need to be aware of their duties and liabilities under company law.

Individuals who are appointed as directors should note that their role is not just for the purpose of forming the RTMCo/RMC but that they are officers on an on-going basis.

An RTMCo must have Articles of Association (articles) which governs the purpose and running of the company. The articles are prescribed by law and the company won’t be valid unless they are in the correct form; the procedure for appointing and terminating directors will also be in the articles. RMCs can have articles drafted specifically for the company’s requirements.

Directors have duties under different areas of the law such as health and safety, insurance and employment law. These comprise the following:

A duty to exercise their powers for their proper purpose

Always check the company's constitution to ensure that you are always acting within your powers and check if there are any limitations on what a director can or cannot do.

A duty to promote the success of the company

This is the primary duty of a director and there are a number of things that should be considered when assessing this duty, for example if a decision will have long term consequences and impact on the community and/or the environment.

A duty to exercise independent judgment

It is important that individuals who are directors are not influenced by others and arrive at decisions on their own. For example neighbourly issues are likely to arise from time to time. In these situations directors should ensure that their decisions are not influenced by their personal opinions.

A duty to exercise reasonable care, skill and diligence

It is important to make sure that decisions are considered carefully and properly. Where uncertainties arise, seek professional advice.

A duty to avoid conflicts of interests

Directors must not put themselves into a situation where their interests conflict with those of the company. The articles of association will detail the procedure dealing with directors’ conflicts of interests. For example, if the RTMCo/RMC is in need of a plumber and a director suggests using his brother’s plumbing company, that director should not participate in the decision-making process.

A duty not to accept a benefit from a third party

Directors should carefully consider any offers of company hospitality. For example, if a builder is engaged in exchange for offering his services to a director personally.

A duty to declare an interest in a proposed transaction or arrangement with the company

Directors must declare both the nature and extent of their interest to the other directors. This can be done in writing or orally at a board meeting (where it should be recorded in the minutes) before the transaction is entered into. For example, if a director works for a fuel company and the block is looking to change fuel suppliers and considers his company, he or she must let the other directors know and not participate in the decision-making process.

It is also important to bear in mind that directors cannot avoid their duties by resigning - a director’s duties will still apply in relation to all actions taken while in office. Bearing this in mind, consider recording in writing matters that have been discussed and decisions made, so there is proof that careful consideration has been given to them. There are additional obligations a director must consider. Directors have a duty to keep accounting records (records), file annual accounts (accounts) and annual returns (returns). Company law requires that every company must keep adequate records that show and explain the company’s transactions accurately and be in a position to disclose the financial position of the company at any time. These records must have entries of the day-to-day sums of money received and expended and a record of the assets and liabilities of the company. A company must keep the records at the registered office or a place that the directors think fit and these must be available for inspection at all times. Records must be kept for three years from the date on which they were made. In addition, directors have a duty to prepare accounts for the company for each of its financial years. In the case of an RTMCo/RMC, the accounts will be a balance sheet giving a true and fair view of the state of affairs of the company as at the last day of the financial year. The directors must approve the accounts and these must be signed on behalf of the directors and filed at Companies House (CH). Returns must be filed at CH each year, usually on the anniversary of the company’s incorporation. The annual return must state the date to which it is made up, the address of the company’s registered office, type of company it is and the officers of the company.

Company law also requires that a company keeps statutory registers (registers) recording the details of the officers and members, and that they should be available for inspection at all times. These registers have to be updated to record events such as appointments and resignations of directors. The contents of the registers and what is showing at CH should be exactly the same. The form AP01 is used to give notice to CH of the appointment of a new director and the form TM01 is used to give notice to CH of the resignation of a director. Failure to prepare and keep records, file accounts and returns and maintain the registers can result in the directors being held liable for penalties, criminal prosecution and possible disqualification. If there is persistent failure to file accounts and annual returns CH may strike the company off the Register of Companies. CH will send several warning letters giving notice of the failure to file these documents. If there is no response from the company, the moment the company is struckoff all the assets of the company will become the property of the Crown and the company will no longer exist. In the case of an RTMCo/RMC, the asset will mean the building of which each member owns a flat.

If a company is struck-off the directors of the company should seek advice on restoration procedures. These procedures can be costly and time-consuming. There will be professional adviser’s fees as well as Companies House fees and penalties. Whether through the court or administrative restoration procedure, it can take up to six months before the company is restored to the Register of Companies.

Clearly, the responsibilities and duties of a director of an RTMco/RMC shouldn’t be taken lightly and having good professional advisers on hand when necessary is invaluable. If in any doubt consult them before taking any action on company matters.

Karina James-Wiltshire LLB, GCILEx is Corporate Legal Advisor with Jordans Corporate Law Limited