Sorting out share certificate paid from money loaned from the Residents Association

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

    Sorting out share certificate paid from money loaned from the Residents Association

    I know this is long but hopefully it’s an interesting one to get your teeth into and I was a tad wary of leaving anything out that may have been even slightly relevant.

    We’ve been left in the lurch after a departure, with no one here really running the show or with an understanding of how to run the show, so I’ve been trying to help sort things out, but it is a big learning curve and after reading so many pages of information across so many websites I know I am at that point where I need to ask some questions of the more knowledgeable of you to be able to move forward, i.e. I am stuck.

    This question resolves around 10 flats owning a share of the Management Company set up in early 90’s to purchase the Freehold and being a Private Company Limited by Shares, with the classification as Dormant. A Resident Association was also set up to take the money for Ground Rent/Fair Wear & Tear fund & Buildings Insurance etc.

    A bit of history before my first question as it may be a bit involved and therefore may be relevant. When I purchased my flat twenty odd years ago, I remember receiving a letter from my solicitor which stated that the owner at the time of the freehold purchase didn’t pay his 10th share of the company and was therefore never given a share certificate. The following owner who I was purchasing from at the time, did also not feel the need to sort out the share certificate. So, this solicitor’s letter explained that I was not able to receive a share certificate at the time of purchase and would need to arrange it through the Residents Association by paying the outstanding balance that should have originally been made at the time of the freehold purchase. I do remember thinking at the time that I couldn’t really afford this extra expense so I would just wait for someone to contact me about it from the Residents Association but as no one ever did, in time it just got forgotten about.

    We are now twenty+ years on and changes are afoot as I was approached to get involved with the Residents Association and help sort out their financial mess, become a director and possibly also the new secretary. On scrutinising the Articles of Association, I got that ‘Houston we have a problem moment’ realising that I couldn’t become a director or have any say in decision making without being a Shareholder.

    I noted the following relevant facts from the Articles of Association in relation to the Shareholders as follows:
    1. The Company’s share capital is £10 divided into 10 shares of £1 each.
    2. Only an owner can own a share.
    3. No property can own more than one share of the Freehold.
    4. Each of the ten shares is valued at £1 and cannot be sold for more than its face value.
    5. Only Shareholders can become Directors and be involved in any decision making.
    I next thought it best to find the paper trail as to who actually paid for the 10th share and discovered that it was initially paid via loans from some of the owners but was then paid back to all of them the following year from the Residents Association Account.

    I then located the original Return Of allotments of shares document from the incorporation of the Management Company and noted the following information from it:
    Description of shares were specified as Ordinary.
    Number of allotted shares was specified as 9.
    Nominal value of each share being £1.
    There were 9 listed names and addresses.

    Looking online at the Companies House filing of the Accounts for Dormant Company since its incorporation, every year has specified the same following line:
    “Called Up Share Capital, Issued & Fully Paid 10 Ordinary Shares of £1-00 Each £10-00”

    Looking at the Companies House filing of the Return showing full list of members, this has every year listed just the 9 names and addresses.

    So, with everything that has been discovered, importantly, the final (10th) share can only ever be allocated to this flat and the Residents Association bank account is down a chunk of the money that should have been paid back a long time ago.

    I have therefore agreed to pay the share of the Freehold owing to the Resident Associations account, and to be honest this is as much related to the fact that it is very likely that my kids will inherit my property one day and will no doubt need to sell it. Without the share of the Freehold sorted out, I would worry about the complications they may well come across at the time of the sale. So the current Secretary and Directors have all agreed to this based on the payment being made. It was also decided to keep all the shareholders in the picture, so a proposal was also sent out regarding this with 90% agreeing, but the 10% being one person that they unfortunately couldn’t contact. But with no value to the shares it was felt that this was just an above and beyond step that wasn’t actually needed anyway.

    The final point I need to add is related to the following paragraph I found in the Articles of Association, but I am hoping that it does not relate to our situation as the filed Dormant accounts to Companies House since the beginning have always stated that all 10 shares are issued and fully paid, the paragraph reads in full:
    “The Directors of the Company may, subject to this Article, within a period of five years from the date of incorporation of the Company exercise the Company's power to allot, grant options over or otherwise dispose of all or any of the unissued shares in the capital of the Company. No share shall be allotted save as a fully paid share.”

    Now, I am sort of hoping someone tells me I am overthinking this and we self-manage the shares. Therefore, if tomorrow I transferred the money that was owing to the Residents Association for the payment that should have been made, a share can be produced in my name and flat number. And because we have already specified to Companies House every year when filing our Dormant Company Accounts that the 10 shares are allotted and fully paid up (as stated above) we can then just add the 10th name and address (my name) to the list of members when we file the next Annual Return.

    There will obviously be internal paperwork made to confirm I am paying the money owing to the Residents Association, but will there in fact be the need to do any other legal document or produce any Company House forms?

    To be honest I would also be interested to hear if this is a common occurrence, with parties not wanting to cough up the large sums to cover their share of the freehold.

    A real big thank you in advance for taking the time to read this and help with any recommendations. Any questions please ask and I hope I haven’t forgotten anything.




    #2
    You appear to have a number of problems.

    I am assuming that the Company owns the freehold interest and its name is registered at the Land Registry.

    The Company does not appear to be dormant, it is entitled to receive the ground rent and it appears to owe monies to whoever contributed towards the cost of the freehold.

    Your main problem is that the Residents Association appears to be collecting monies which do not belong to it and using those monies incorrectly for other purposes.

    What does the lease say? Who is entitled to collect service charges? Is the Residents Association collecting service charges or voluntary contributions? Either way, the monies should be held in trust and used only for the stated purpose. You are not kidding when you say that the Residents Association is in a financial mess.

    You should not pay the Residents Association because you do not appear to have any legal contract with it.

    Your share of the freehold should be paid to the Company, which should then repay any monies from whom it has borrowed. The Company should then register you as a member. The shares in the Company appear to have a value ie a share of the freehold interest less any loans.

    You should refer to the share register of the Company to see if it has issued 9 or 10 shares. If it has issued 9 shares, the information supplied to Companies House has been incorrect. If it has issued 10 shares, the register should state the holder of the 10th share, who would need to transfer the share to you. If the Company actually issues share certificates, it should issue one to you. Once you become a member, you will be entitled to be a director and be part of the decision making process.

    Your solicitor should have made enquiries and highlighted all the problems when you were purchasing the property.

    Comment


      #3
      I can offer nothing of value to eagle2's ,as usual, excellent advice.
      From personal experience I will add that I would certainly not agree to becoming Company Secretary. As in most voluntary organisations a few end up doing a lot. If there is anything wrong you end up carrying the can. Why don't any of the others want to do it ?
      Pay a professional and everybody contributes equally to getting the work done.
      Besides it possibly needs a professional to sort things out.

      Comment


        #4
        The Management Company purchased the freehold title and has been declaring itself a dormant company to Companies House for over 20 years ( which means it should not be demanding ground rent.).

        The Residents Association has been collecting the service charge payment from the flats for maintenance of the building. Going forward, the Residents Association should stop collecting annual ground rent .

        Comment


          #5
          Many thanks for your feedback Eagle2 and others, I’ve noted some points alongside your comments in the hope we can help towards a resolution, it is clear that mistakes have been made in the past, but hopefully we can come to a resolution to be able to move on.

          I am assuming that the Company owns the freehold interest and its name is registered at the Land Registry.
          Yes It does own the freehold and it is registered at the Land Registry.

          The Company does not appear to be dormant, it is entitled to receive the ground rent and it appears to owe monies to whoever contributed towards the cost of the freehold.
          The Company has been classified as dormant pretty much since its incorporation. You’ve pre-empted a question here which I was going to follow up with as I have always thought it strange that it is called a Ground Rent but it’s actually for the Fair Wear & Tear fund for the shared area. This is the only fund that is collected along with the share of annual buildings insurance for the block. These are paid into the Residents Association and have been since incorporation and everyone knows that the ground rent collection is in reality the fair wear and tear fund and I don’t believe it has ever been questioned. When you realise it is less than £100 a year you can understand why no-one complains, going forward can we get formulate an agreement to rename this at an AGM, or is it not that simple.

          Your main problem is that the Residents Association appears to be collecting monies which do not belong to it and using those monies incorrectly for other purposes.
          As above I can’t believe in the past they ever intended to mislead owners into the fact that the ground rent was actually a Fair Wear and Tear Fund. I am hoping though that could be easily resolved with a renaming going forward.

          What does the lease say? Who is entitled to collect service charges? Is the Residents Association collecting service charges or voluntary contributions? Either way, the monies should be held in trust and used only for the stated purpose. You are not kidding when you say that the Residents Association is in a financial mess.
          On checking the lease I can’t see anything regarding the collection of service charges. There is a paragraph that may be relevant as follows, or if not maybe you can prompt me to look out for certain wording:
          “At all times during the said term to pay and contribute one tenth of the cost of repairing maintaining and renewing the garage forecourt shown coloured yellow on the said plan and of such of the boundary fence and walls of the estate as are not specifically included in any demise of any part thereof.”
          I am not sure if it is relevant but in the Articles of Association I have found the following paragraphs:
          “14. (a) Subject to the provisions of paragraph (b) of this Article the Directors shall endeavour to carry on the business of the Company so as not make profit or loss.
          14. (b) The Directors in their absolute discretion may make provision for creating and setting aside a reasonable reserve fund for any general or particular purpose.”
          As mentioned above could this be agreed at an AGM (collection of a wear and tear fund).


          You should not pay the Residents Association because you do not appear to have any legal contract with it.
          Even though the money in fact ended up came from this account to purchase my flats 1/10th share of the freehold. In fairness should it not be paid back here,

          Your share of the freehold should be paid to the Company, which should then repay any monies from whom it has borrowed. The Company should then register you as a member. The shares in the Company appear to have a value ie a share of the freehold interest less any loans.
          I assume you mean the management company, which being dormant I can’t see how we can pay into it. Do we actually need to if the full amount including what would be my share was paid into it and it shows no liabilities in its dormant accounts.
          This may be of interest to show you what is put on the dormant account filed at companies house every year:

          Assets (freehold) £5,000.00
          Liabilities £0.00
          £5,000.00


          Called Up Share Capital, Issued & Fully Paid 10 Ordinary Shares of £1-00 Each £10-00
          Authorised Share Capital 10 shares of £499.00 £4,990.00
          Profit and Loss Account £0.00
          £5,000.00


          You should refer to the share register of the Company to see if it has issued 9 or 10 shares. If it has issued 9 shares, the information supplied to Companies House has been incorrect. If it has issued 10 shares, the register should state the holder of the 10th share, who would need to transfer the share to you. If the Company actually issues share certificates, it should issue one to you. Once you become a member, you will be entitled to be a director and be part of the decision making process.
          The share register shows that only 9 shares have been issued. So we now understand that some information supplied to companies house was incorrect, but not intentionally I am sure. Can we not just correct this, we are not talking about a corporation mistake, there must be a level of acceptance when it is a few people trying to best run and help out the residents of a couple of flats. The company does issue share certificates by the way.

          Your solicitor should have made enquiries and highlighted all the problems when you were purchasing the property.
          I totally agree with this and in hindsight I wish I would have chased it up more at the time. But being just after my divorce around 20 odd years ago, it felt like another financial burden I just couldn’t afford to deal with, hence I brushed it under the carpet and no-one at the time ever asked me for the money. But now I really would like to get it sorted the best way possible and the no. 1 priority is my share certificate.

          And in answer to your question Scott22, Why don't any of the others want to do it ?
          Its the usual answer of everyone wanting an easy life, we all know it's a thankless task and in truth once we get over these current hiccups, it should hopefully be fairly straight forward, as no-one here wants to upset the apple cart. There are two of us looking into what we need to achieve and knowing all the other residents there isn't any others who either of us feel could do it anyway. We'll probably look to share the duties and maybe even look to both become the secretary, I assume we can.

          Thanks again and would definitely welcome any more help on the subject, if you need any more info please ask and again I hope I haven't made any mistakes. We can get there in the end, I hope.

          Comment


            #6
            I understand that you are trying to do things yourselves to save money but there are several mistakes which need to be corrected. Otherwise there will be problems in the future, perhaps when someone is advised not to pay monies or when one of you tries to sell a property.

            1 You state in #1 that the authorised share capital of the Company (you only refer to one Company which owns the freehold) is £10 divided into 10 shares of £1 each. In #5, you state that the authorised share capital of the Company is £5,000 and there are two classes of shares, one of £1 each and another of £499 each. It is a matter of fact whether or not the Company has increased its authorised share capital.

            2 It is also a matter of fact whether or not the Company has issued 10 shares of £1 each and 10 shares of £499 each.

            3 The accounts for the Company are incorrect, only share capital which has been issued should appear within the balance sheet, any authorised share capital which has not been issued should be stated as a note to the accounts.

            4 The obvious question is where did the RA obtain monies to finance the 10th share when it appears to have no money of its own? It appears that the RA has lent monies to the Company, which has a liability to repay the monies when you purchase the 10th share. There ought to be directors’ minutes which record what was agreed at the time.

            5 It is a matter of fact whether or not members have been charged ground rent. If so, the monies belong to the Company and should be recorded within the Company. As you were not a member, there is no reason why you should not pay ground rent.

            6 It is also a matter of fact whether or not members have been charged a “Fair Wear and Tear Fund”. It is important for you to distinguish between monies collected from leaseholders under the terms of the lease and monies collected from members as a Company charge for a “reserve fund”. Your reply suggests the latter. In that case, the RA is collecting monies on behalf of the Company and the amounts should be recorded within the Company and renamed “reserve fund”.

            7 The monies collected for the “Fair Wear and Tear Fund” should be held in a separate bank client account and should be used for no other purpose.

            8 The monies collected for the buildings insurance should also be held in a separate bank client account until they are used.

            9 When you pay for your share of the freehold, there appears to be no reason for a RA to exist, you will all be equal members of the Company which could make charges directly to leaseholders (ground rent, insurance) and to members (reserve fund). It is for the other members to decide whether or not you should pay the same amount as the other members some 20+ years later.

            Comment


              #7
              Since the Management Company has been reporting "dormant company" status to Companies House for past 20 years , it is better to continue as a "dormant company" ( with no ground rent income and no tax liability ) and the annual fee to Companies House is paid from the Service charge bank account ( operated by the Residents Association )

              This means the previous sums raised as "ground rent" by the Residents Association should be transferred to "service charge" bank account held for building maintenance and repairs etc.

              Comment


                #8
                Originally posted by Gordon999 View Post
                Since the Management Company has been reporting "dormant company" status to Companies House for past 20 years , it is better to continue as a "dormant company" ( with no ground rent income and no tax liability ) and the annual fee to Companies House is paid from the Service charge bank account ( operated by the Residents Association )

                This means the previous sums raised as "ground rent" by the Residents Association should be transferred to "service charge" bank account held for building maintenance and repairs etc.
                The Freeholder Company is not dormant, it has transactrions of its own when it collects ground rent and reserve fund contributions. It could use the monies collected to pay for outgoings eg repairs and maintenance or insurance, which would be allowable for tax purposes. The errors of the past do not entitle it to continue filing incorrect information.

                The RA seems to be acting as an agent of the Freeholder Company and the only transactions of its own appear to be the loan to the Freeholder Company. The source of those funds needs to be investigated because it could well be that the Freeholder Company has actually lent money to itself which is not permitted. The RA is not entitled to retain the ground rent or to transfer monies to a fund for maintenance, it can only take instructions from the Freeholder Company, which would still need to record the transactions. Ground rent and Company charges may not be regarded as "service charges".

                Comment


                  #9
                  On top of the rights and wrongs of what is going on, it is still important to note that this has been running this way for nearly 30 years with the Management company filing dormant accounts, ground rent being collected through the RA, albeit for the purpose of a “Fair Wear and Tear Fund”, Annual Buildings Insurance being collected through the RA to cover all the flats. Nothing has changed, no flat sales have faltered and companies house hasn’t closed the company down. I found a standard response letter that has been sent to solicitors in relation to sales of flats with a paragraph that states:
                  “Although there is no formal maintenance/service charge. Income from ground rent is used to fund some of the repairs to the communal areas.”
                  They seem to have got away with that statement through solicitors.

                  Could a lot of what we have been discussing be down to interpretation. For example, you see the way we file our dormant annual accounts a showing that we have two types of shares, we don’t, there are and only have ever been 10 Ordinary shares at £1 each. I believe that they are being displayed as a zeroised balance sheet to somehow show that it is a dormant account. The line you have picked up on showing a value of £499 for 10 shares with a total of £4,990, which I have displayed again below for reference. Here, I believe that it was felt that to balance the sheet against the value of the Assets (freehold) as well as showing the cost of the 10 ordinary shares at £1 each. They obviously wanted to include the value of the initial capital cost where each of the 10 leaseholders paid at £499 plus the £1 for the share. With everything wrong with it has still been accepted at companies House. Should we remove the statement regarding the assets and just show the line “Called Up Share Capital, Issued & Fully Paid 10 Ordinary Shares of £1-00 Each £10-00”. If not, what information should it show?
                  Assets (freehold) £5,000.00
                  Liabilities £0.00
                  £5,000.00
                  Called Up Share Capital, Issued & Fully Paid 10 Ordinary Shares of £1-00 Each £10-00
                  Authorised Share Capital 10 shares of £499.00 £4,990.00
                  Profit and Loss Account £0.00
                  £5,000.00

                  The lease states that a ground rent of £100 has to be paid per annum. If at a meeting during the time the freehold was purchased, if there was a proposal made and agreed that the Ground Rent would continue to be collected by the Residents Association Account (as it always had been in the past) but now used for purposes as a “Fair Wear and Tear Fund”, would that have been an acceptable situation and keep the Management company officially dormant. Whatever happens it is important that the management company remains dormant going forward.

                  I read an interesting comment from a similar question elsewhere on the web which was answered by a seemingly knowledge person with a 3K post level. The question was in relation to whether a dormant company can collect ground rent with a paragraph in the answer stating:
                  “A dormant company is one that has no significant transactions and ground rent is generally accepted as not significant and permitted as dormant. SC and Insurance are not involved as said- they are held on trust and managed.”

                  There must be many similar flats, owning the freehold, running in a similar way, self-managing and filing dormant management accounts. Having to collect ground rent due to the lease requirements and with a need to have some form of maintenance fund. Can someone please explain how typically these handle the payments and funds?

                  Thanks again for any help and advice it is very appreciated. It would be lovely to hear a do this, do that, done deal, here’s hoping and again apologies if I’ve made any mistakes.

                  Comment


                    #10
                    Your comments only confirm your statement in #1 that there is “no-one … with an understanding of how to run the show”. The Company’s accounts are fundamentally wrong and I recommend that you instruct an accountant to prepare a set of accounts for you.

                    The Company does not satisfy the requirements to be regarded as dormant either for Companies House or for Corporation Tax purposes and the directors should consider the position each year because it can change from one year to another. Whilst service charges collected under the terms of the lease may be excluded from the accounts, the Company is collecting other monies eg ground rents, a reserve fund or “fair wear and tear fund” which are significant transactions and need to be recorded by the Company.

                    Companies House do not check accounts, they simply accept them for filing, the directors are responsible for the accuracy of the accounts. Fobbing off a solicitor with incorrect information is nothing to be proud of although I accept that the solicitor should have returned to the Company with further questions.

                    There are formalities to be followed in order to increase the share capital of the Company and unless they have been followed, the authorised share capital remains at £10 and the issued share capital appears to be £9 until a share is issued to you.

                    The contributions from 9 members to purchase the freehold are usually regarded as loans in order to allow flexibility. The question of who has financed the 10th contribution remains unanswered, where exactly has the money come from? If it is from ground rents collected, you cannot claim that those monies are used only for maintenance.

                    Only the Company as freeholder is entitled to receive ground rent, it makes no difference who collects the monies on behalf of the Company, it should be recorded within the Company. If the Company decides to spend the money on maintenance instead of collecting service charges, it should record the actual expenditure within its accounts and carry forward any surplus income.

                    You seem to be confused with genuine management companies which do nothing else but collect service charges (trust monies) in accordance with the lease and spend those monies on service charge expenditure. As the trust monies do not strictly belong to those companies, they may claim to be dormant as long as they have no other significant transactions.

                    Moving forward, the members of the Company may decide not to collect ground rents and registration fees and they may also agree to change the terms of the lease so that a reserve fund is permitted and is collected as a service charge. Even then the Company may only claim to be dormant in those years when it has no other transactions eg if it spends monies on improving the property which cannot be charged as service charge expenditure, it would not be dormant in the year when that expenditure is incurred.

                    Comment


                      #11
                      In post #10, Eagle 2 has stated the "company accounts are fundamentally wrong". But if the company has been declaring itself as a "dormant company" for past 20- 30 years in annual filings to Companies House and you overturn those accounts, you will expose the company directors to more problems ( such as directors committing criminal offence by filing false accounts and not paying tax on ground rent income ).

                      So it is better to continue with the "dormant status" in annual filings to Companies House and you arrange transfer of any " previous ground rent money received from leaseholders " to the service charge bank account ( RA's bank account holding leaseholders moneys for maintenance of the building). No more ground rent demands in future.

                      If you have agreed to re-pay to the service charge bank account, any funds owed by your flat, you can issue the 10th share to "leaseholder of your flat", without affecting the dormant status of the company.

                      Comment


                        #12
                        It is not as simple as that, the directors have approved false accounts, they have filed incorrect accounts at Companies House and they have supplied false information to purchasers. They are in serious difficulty because they have chosen to try to save money by carrying out tasks themselves without having the required knowledge.

                        In my opinion, it is better to correct the errors rather than compound them.

                        I don't see that you can suddenly say that the ground rent demands for the last 20+ years were not really for ground rent at all, they were something else. Saying that the service charge accounts have been incorrect for the last 20+ years does not help either.

                        From what we have been told, the lease does not permit a reserve fund or "fair wear and tear fund" to be included within the service charges, maintenance should be charged when incurred and the reserve fund is collected as a Company charge #5. So it would be wrong to describe the charges as service charges.

                        I suspect that if you go back 20+ years and calculate the ground rent which has been collected, you will not have that amount of money in the bank, so the directors would be in breach.of trust.

                        The change in share capital will mean that the Company is unable to claim that it is dormant at least in that year,

                        I don't see how you can pay the same amount towards the freehold as the other shareholders after 20+ years, it is grossly unfair to the others who paid at the time.

                        I agree that the shareholders can agree not to collect ground rents in future.

                        I don't agree that the shareholders can agree to transfer monies from the Company to the service charge funds if the lease does not permit that sum to be held, You would need to amend the lease first.



                        .

                        Comment

                        Latest Activity

                        Collapse

                        Working...
                        X