Financial liability of shareholders of a freehold management company

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    Financial liability of shareholders of a freehold management company

    Hello,

    I’m hoping I can get some guidance with an issue we’re experiencing in our block of flats.

    We’re10 flats in total – all of which are leasehold share of freehold. We have one director of the freehold management company who is also a flat owner.

    We do not currently employ a managing agent.

    The current director has not been keeping up with his responsibilities as a director e.g. not sending around service charge summaries annually, not following proper procedure for meetings and service charge increases etc. He has also shared leaseholders details with each other (addresses and emails) and been open about who has and hasn’t kept up with service charge payments.

    One of the leaseholders in now threatening court action for breach of directors duties and GDPR regulations (as their information including the fact they were in arrears with their payments for service charge was shared with other leaseholders).

    The director does not have director or officer insurance.

    To cut a long story short we're not sure who will be liable for any fines, legal fees and damages should this situation escalate?

    Our lease doesn’t state specifically that the service charge includes payment of legal fees or fines – it simply refers to the requirement of leases to pay an equal proportion of the ‘rates, taxes, assessments, charges, impositions and outgoings’ that are attributable to the flat.

    We have two main questions in this case:

    Question 1:
    Who would be financially liable in the following circumstances (a) the director personally or (b) the shareholders of the freehold company:
    1. The solicitors fees to get legal advice and/or represent the company in court should legal action be bought against them?
    2. Mediation fees should it reach that stage?
    3. Payment of the fee should the director be charged a fine for breech of duty by companies house?
    4. Any fines for lack of GDPR compliance by the ICO
    5. The costs of damages should the court find in favor of the lessee.
    Question 2:
    If the lessees as members of the freehold company are liable for any of the above fines/fees/damages, would that mean that the lessee who has reported the company would also have to pay his share of the fines/fees/damages?

    Any help on this would be gratefully received.

    #2
    Generally, the company will be liable, but the director can be personally liable if it can be shown he consented to the disclosure.

    If the company must pay the costs, there is no provision generally under the lease for those sort of admin costs to be recoverable under the lease and therefore unless the shareholders are prepared to put funds into the company the company may have to sell its freehold interest to raise the funds to discharge the debts if the dames awarded are substantial. If the company has ground rent income coming in this could be used to defray the damages and costs.

    If the director is personally liable, then he will have to bear the costs himself - he will generally have no right to claim the monies from the company

    It is a sobering reminder that lessees taking on responsibilities for managing a property need to be remunerated properly and have the company pay for Directors liability insurance. The company needs to set a realistic management fee to cover these costs.

    Comment


      #3
      My sympathy is with the unfortunate person left as sole director when clearly struggling. I suggest there is arguably contributory negligence.

      As shareholders you own the Company and appoint and remove directors. Shareholders don't appear to have done much.

      Voluntary directors are judged by what could be expected from someone with their knowledge and experience. What is the poor person's qualification for appointment ?

      What damage has been done by the disclosure ? It would be a great mistake to become involved in legal wrangles. Only good for solicitors. You can call an E.G.M to appoint new directors. Consider appointing an M.A. It can make a difference.

      It appears to me that there has been little, if any, willing leaseholders to take on any position requiring work. The difference now appears to be someone threatening legal action. Courts prefer things settled without starting proceedings.

      If people accepted responsibility to pay service charges nobody would have debts.What help has been offered to the director ?

      Comment


        #4
        The freehold company should have atleast 2 directors who should appoint a professional managing agent , paid to administer the service charge account and file the annual accounts to Companies House etc if the directors themselves do not have the ability to self manage. It would suit a retired leaseholder living in the block . Call an EGM to appoint new directors.

        Comment


          #5
          I agree that the sole director needs some assistance from other members and the best way forward is to appoint new directors. You could remove the existing director from office if you wish as long as you have sufficient volunteers and the minimum number of directors.
          Legal action is unlikely to assist any of you and you are likely to have to pay the costs one way or another.
          A breach of GDPR regulations may result in a fine or a warning for the Company. The leaseholder is likely to have difficulty in proving any financial loss as a result of the breach. So the best way forward is to make the director aware of the regulations and ensure that he complies on behalf of the Company in future.
          I recommend that you check the Articles of Association for the Company, there is usually a clause towards the end stating that the Company will indemnify every director against any liability incurred whilst executing his duties of office. A director is usually seen to be acting on behalf of a Company and he is unlikely to be held to be personally liable unless he is benefitting personally or persistently ignoring legislation.
          In reply to your questions, the Company is likely to be liable for the costs and if it cannot recover them from the leaseholders under the lease, it would need to recover them from the members, who are the same individuals. The leaseholder/member bringing the action would be responsible for a share of those costs.

          Comment


            #6
            Letting other lessees and shareholders know about the exact source of a financial shortfall where they bear the brunt of it -- is not a breach of GDPR. That has already been agreed.

            If the main upshot of the OP's post is that lessees and shareholders should not be allowed to know who has not paid a legitimate service charge, then I have no sympathy at all. I suspect the OP is one of the lessees who thinks that everybody else should cover their debts.

            There is no point whatever bringing this up as an ICO case.

            Deal with the real problem. If the service charges are illegitimate, bring a service charges case to FTT. If some lessees are not paying legitimate charges and the Company is doing nothing about that, bring a case to FTT to appoint a manager (if not possible to remove the Director(s) in charge

            Everything else is just faff and nonsense.

            You also need to distinguish between company and lessee related matters. For example what says the Director even needs to hold meetings. Shareholders are entitled to know the address for service of other shareholders - this is also a legitimate use of data. Indeed if you were to bring an FTT case you would want to know that.

            Comment


              #7
              I agree that the names and addresses of members can be shared so that is not a breach of GDPR. Email addresses and who is in arrears is likely to be a breach.

              I wouldn't bring a case before the FTT about service charges, it is better to call an EGM and appoint new directors.. I would not ask the FTT to appoint a manager either, if you want a managing agent, it is better again to let the members decide at the same EGM.

              Comment


                #8
                eagle2,

                Don't agree with that - sorry. Firstly the ICO has discussed this already by way of specific example and although there may be some questions (which I won't discuss here) I know of no court cases where this has been challenged. The problem is that lessees are entitled to certain information by way of other laws (and often the leases too) and DPA legislation cannot eliminate other contractual or legal rights to information.

                Certainly under circumstances where the freeholder was prepared personally (out of their own pockets) to write off debts or interest owed or prevent delay works as a result of arrears by paying the shortfall themselves - then it would not be an issue - but for a small private company with no other asset or income this is impossible. If other lessees have to pay an extra charge (beyond the lease) to cover unrecovered debts then they are entitled to know exactly what these are and exactly why they have not been recovered. Either that or the leases have to be breached by the freeholder - can't have it both ways...

                Furthermore in the present circumstances lessees are also shareholders or may be officeholders, and have rights to know what their company is doing under Company law, or what exact debts or interest are being written off by Directors. Most importantly of all it might well be the case that Directors themselves are the non-payees. It would be a massive breach of every possible kind of trust/Company law and just about every operation of such a company if Directors were to hide their own debts or debts of their family members or friends from other shareholders under the banner of a DPA excuse - such persons would be unfit to hold office.

                Unfortunately it is likely to be the case in the present scenario (where Directors are unwilling to provide information and where it is also impossible to take the simple step of removing those directors that it WILL be necessary to appoint a manager via FTT. Directors who are unwilling to provide information and also who cannot be removed are most unlikely to appoint an agent who is going to behave differently.

                Comment


                  #9
                  Originally posted by FlatDrama View Post
                  Question 1:
                  Who would be financially liable in the following circumstances (a) the director personally or (b) the shareholders of the freehold company:
                  1. The solicitors fees to get legal advice and/or represent the company in court should legal action be bought against them?
                  2. Mediation fees should it reach that stage?
                  3. Payment of the fee should the director be charged a fine for breech of duty by companies house?
                  4. Any fines for lack of GDPR compliance by the ICO
                  5. The costs of damages should the court find in favor of the lessee.
                  Question 2:
                  If the lessees as members of the freehold company are liable for any of the above fines/fees/damages, would that mean that the lessee who has reported the company would also have to pay his share of the fines/fees/damages?
                  Anyhow to answer the direct question asked by the OP - the answer (except for possibly a Director who can be sued personally)
                  is the freeholder. The freeholder is a company owned in part by you. The freeholder has no other source of income (unless ground rents are collected) so the answer as to who pays is YOU. This might not be recoverable under the leases but effectively you will be suing yourself. If the costs are not recovered, then the company is bankrupt, gets struck off, and the freehold is lost to the crown. You might not like the outcome.

                  Which is exactly why small "share of freehold" companies are not exactly the great thing imagined.

                  Comment


                    #10
                    In this case, a single member may call an EGM for the purpose of appointing new directors. That is a far better way of making changes than applying to the FTT. Why ask the FTT to appoint a manager when the members can appoint one at the EGM?

                    Comment


                      #11
                      Yes, but if they could do that, they could just as easily remove the Director who is hiding stuff (possibly their own debt). The reason managers are appointed by Tribunal is that the Directors form a majority or cannot be removed.

                      Calling a meeting only achieves something if the structure of the company is such that something can be achieved.

                      Managers are appointed by directors not at EGM. Managers appointed by a company also report to the company and carry out directions of the company (which might or might not involve breaching the lease).

                      The aim of AoaM cases at tribunal are not to get a managing agent appointed -- they are to get a manager appointed (big difference). Been there and done that and some FTT appointed managers (in London at least) are absolutely diabolical - anyone who wants to do this PM me.

                      Comment


                        #12
                        From what we have been told, it is a simple matter for the members to call an EGM to appoint and replace directors and appoint a managing agent if they wish, Applying to the FTT to appoint a manager is a drastic step which should be avoided if possible, the manager would then report to the FTT and not the leaseholders. We have read horror stories on here of the appointments being extended for indefinite periods and leaseholders having little say in the matter. Where the freeholder and leaseholders are the same, it is unnecessary and not in their best interests, Here, it is best to help out the director or replace him with someone else, who can do better, there is no point in criticising him or taking legal action against yourselves,

                        Comment


                          #13
                          Since OP is not responding - we don't know that. I suspect if that were possible it would have already been done.

                          Suggest you read through a few hundred judgments of FCTT Appointment of a manger cases. You will soon realise that it is not true that "when the freeholder and leaseholders are the same" their interests are aligned, and in fact a large proportion, perhaps a majority of these cases arise in exactly that situation.

                          In any case so called "share of freehold" situations are not the same as "freeholder and leaseholders are the same". It is often the case that only one set of leaseholders is to all intents the freeholder, and other leaseholders hold shares which have no value. The freeholder is the company. What a company does and what it's shareholders want (or the law requires) are not necessarily aligned.

                          It is a drastic step however - I agree - but often the only option.

                          Comment


                            #14
                            I agree that we have not been told everything and we can only guess what the only director would say in reply but we are told that there are 10 leaseholders and they are also members of the freehold company, so it should be possible and simple to call an EGM. It is of course subject to the Articles which would set out voting rights. I accept fully that any suggestions are dependent on the information supplied to us but I cannot think of any circumstances where I would recommend applying to the FTT for a manager to be appointed, I would suggest selling and moving on first.

                            Comment


                              #15
                              Very interesting thread,

                              In the highly unwelcome scenario where a companies debts can't be recovered from Leaseholders and it's struck off and Freehold returns to the Crown as you say.

                              Would the existing leases still be sound, would leaseholders get the opportunity to form a new company and pay ground rent to the crown?

                              It's the one leaseholders fear most but how bad could it be.

                              Comment

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