Ailsa Burkimsher of Haines Watts Service Charge looks at Articles of Association of a Company and why they matter.

All companies (including Residents’ Management Companies (RMCs)) must have Articles of Association. This is a legal document that sets out the rules that directors must follow when running the company. It covers how various decisions should be made and specifies what the company is for and what should be done with any profits.

What are the consequences of not following the Articles?

The Articles are legally binding on the company and its directors and members.

A breach in following the Articles is usually an offence committed by the directors. Whilst in practice criminal prosecutions for Company Law breaches are few and far between it is possible that Companies House may issue a warning letter and it is likely that the directors are in breach of the general duties to exercise reasonable care, skill and diligence.

An example of a problematic Articles Clause – “The Audit Trap”

Most companies that were formed within the last few decades will have Articles which state that the company does not require an audit.  However there are RMCs which were incorporated for example under the Companies Act 1948 which may contain the requirement for audit. An example clause is as follows:

“Once at least in every year the accounts of the Company shall be examined and the correctness of the income and expenditure accounts and balance sheet ascertained by one or more properly qualified Auditor or Auditors.”

In this case the RMC company is dormant (since the service charge transactions are correctly reported in the separate service charge accounts in line with accounting guideline TECH03/11 and the RMC has no other income or activity).

However, if the Articles contain a requirement for audit then registered auditors will need to perform an audit (even if a company is dormant). This is likely to cost is significantly more than the usual fee for preparation of a set of dormant set of accounts.

Whilst it is possible to change the Articles going forward this cannot remove the requirement for an audit for a year that has already ended.

How to change the Articles

If the shareholders and directors of a company wish to change the Articles, for example to remove the requirement for an audit, then they will need to follow Company Law procedures to formally adopt new Articles.

It is recommended that a company secretarial specialist is engaged to assist with this procedure as there are various pitfalls which need to be avoided.

Role of Professionals

However inconvenient a clause in the Articles (such as a requirement for the audit of a dormant company) it is not something that qualified accountants can ignore. Indeed, it is something which the accountancy regulatory bodies can discipline and fine accountants for!

Extract from disciplinary hearing:

“Firm XYZ prepared dormant statutory accounts for ABC Limited for the year ended 31 December 20XX in which the directors claimed exemption from audit, when the company’s Articles of Association required that the accounts of the company be …audited.“

Managing Agents often fulfil the role of Company Secretary for their RMC clients and it is important that they understand their obligations. The RICS Service Charge Code states that provision of company secretarial services is a regulated activity under the Money Laundering Regulations 2007 and that ‘know your client’ checks should be undertaken. The level and extent of any company secretarial services provided by Managing Agents should be set out in an agreement and it is important that the company administration is differentiated from the management of the landlord/leaseholder relationship.

Conclusion

The Articles of Association of a company are just one of the myriad of requirements covered by Company Law which need to be considered by the directors in the running of a company.

By using a specialist in company secretarial matters you can ensure that your RMC is adhering to Company Law legislation. At Haines Watts Service Charge we have specialist Company Secretarial experts working alongside our Service Charge accountants.

Ailsa Burkimsher is a Client Services Manager at Haines Watts Service Charge.