Does democracy tilt the scales of justice? I am writing about the lessee of a flat in a building converted into four flats. The freeholder/lessor is a property management company limited by shares and guarantee (which is also the residents association). She has a share in the company and is a director. This is equally true of the lessees of the other three flats, all are on a par.
The accounting was badly muddled over a period of years but has now been sorted by a qualified accountant. It shows that her service charges are fully paid up but the other three owners are collectively in arrears of £2,000. They are in denial of the proof and intend to band together to write off the arrears. Since together they represent a majority they control the company, so how does she prevent them from depleting what should be the company’s funds and therefore taking unjust advantage of her in this way? And how can she force them to pay up their arrears? Otherwise the debts may stay on the books but remain uncollectible and eventually become bad debts.
PS: I take it that wiping out one’s arrears represents a pecuniary interest in the outcome of a resolution. The company’s articles of association are Table A (1985). Article 94 stops a director from voting on a resolution if he has an interest in it which conflicts with the interest of the company. But this can be sidestepped by article 96 which by ordinary resolution can suspend article 94. But I presume the same interest which restricts voting per Article 94 can also restrict voting on the resolution under Article 96?
Further, can the lessee I am writing about act on her own initiative and represent the company in a claim for the arrears using the small claims process? Could the dissenting directors prevent this? Who would be liable for the costs of such an action? Thank you if you can throw some light on this.
The question raises three key issues. Firstly, what can the Lessee in question do to stop her fellow lessees and co-directors/shareholders from banding together and agreeing to write of the £2,000.00 worth of service charge arrears which she claims that they owe and what can she do to compel them to pay those arrears?
Secondly, are the three co-directors/shareholders in actual fact precluded from voting on the resolution to write off the service charge arrears by virtue of the fact that they have an interest in the resolution which conflicts with that of the company, pursuant to Article 94 of Table A and if so, can they suspend the operation of Article 94, using the provisions of Article 96?
Finally, can the lessee represent the company in a claim against her co-directors/shareholders and who will bear the costs of such a claim?
Although the issue arises out a dispute between leaseholders, the answers to the questions are to be found in Company Law. The Property Management Company is the Freeholder of the building in which the flats are located. We are told that the lessees of each of the four flats are all directors of and shareholders in, the Freehold Property Management Company. Although no information is given, we presume that the shares held by the lessees all carry equal voting rights. We also assume that the arrears complained of are legitimately owed, given that the Company’s accounts have now been professionally prepared. To answer the questions set out above, we must look to the Freehold Property Management Company’s constitution.
The Company has adopted Table A as its Articles of Association. Table A was the prescribed Articles of Association for Limited Companies which were incorporated prior to the implementation of the Model Articles brought in by the Companies Act 2006.
As to the first question, the Lessee’s difficulty is that she is outnumbered. Her co-directors/shareholders control 75% of the voting rights between them and so if they wish to band together and pass a resolution to write off their jointly incurred arrears, they have sufficient voting rights to do so.
There is little that the Lessee can do to stop her co-directors/shareholders from doing this, other than to pressure them into perhaps “doing the right thing” bearing in mind their fiduciary duties to the Limited Company, such as those to avoid conflicts of interest and to act in a way which would promote the best interests of the company.
Secondly, the writer is entirely correct to highlight the provisions of Article 94 of Table A as relevant. Article 94 holds that:-
“A director shall not vote at a meeting of directors or of a committee of directors on any resolution concerning a matter in which he has directly or indirectly, an interest or duty which is material and which conflicts or may conflict with the interests of the company….” . The article does contain some exceptions which are not relevant here. Clearly, writing off arrears which are legitimately owed to a company is not in the interests of the company but very much would be in the interests of the directors seeking to write them off, since it is they who owe the arrears. Hence, there is a clear conflict of interest and so the directors should not vote on the resolution.
However, Article 96 of Table A holds as follows:-
“The Company may by ordinary resolution suspend or relax to any extent, either generally or in respect of any particular matter, any provision of the articles prohibiting a director from voting at a meeting of directors or of a committee of directors.”
So, theoretically, the Company can pass an article under Article 96 to suspend the operation of Article 94, thereby allowing the co-directors/shareholders to vote on the resolution to write off the arrears, notwithstanding their conflict of interest.
Again, our lessee is hamstrung by the numbers game: there is little she can do to stop the article 96 resolution from being passed if her co-directors band together and determine to vote it through.
Finally, presuming that the relevant resolutions have been passed and that the arrears have been written off, can our lessee bring an action against her co-directors/shareholders on behalf of the company, to recover the arrears? Under Article 70 of Table A, “The business of the company shall be managed by the directors who may exercise all the powers of the company.” Reference to “the directors” in the plural sense, suggests that a degree of unanimity is required to exercise the powers of the company. Such unanimity is obtained by the passing of resolutions and so in order to be able to issue proceedings in the company’s name, a director’s resolution would first be necessary.
Simply put, the co-directors/shareholders will not pass a resolution entitling the company to issue proceedings against themselves. As such, the conventional route is likely to be closed off.
However, salvation could be found in the fact that the lessees wear two hats: shareholder and director. Part 11 of the Companies Act 2006 rationalised and clarified the rules on what are known as “Derivative Claims”: actions by shareholders against directors, in the name of the company, for breaches of fiduciary duties by those directors. Our lessee is a shareholder and so she can seek permission from the court to bring a derivative claim in the name of the company against her co-lessees in their capacity as directors for a breach of their respective fiduciary duties to the company.
As the paragraph above indicates, our lessee would need permission from the court before bringing the derivative claim. The tests applied when considering applications for permission set a fairly high bar and so permission is, case-law suggests, difficult to obtain. In addition, a fatal stumbling block can be shareholder ratification. If the other shareholders have authorised the act complained (eg, the writing off of the legitimately owed arrears) in advance, or ratify if after the event, then this will be sufficient to defeat the application for permission to bring the claim. Therefore, if the co-directors/shareholders are well advised in advance, they can defeat the derivative claim fairly easily.
However, our lessee can of course apply pressure through informal methods. She can use the threat of a derivative claim, the associated costs and time which will need to be expended to deal with it and the ill-feeling which it would be likely to generate, to try to compel her co-directors/shareholders to do the right thing and pay the arrears.
One final option may be for the Lessee to try to apply to the First-tier Tribunal (Property Chamber) to challenge the validity/reasonableness of the decision to write off the arrears. However, we would need to see all of the available documentation before advising further on this point.
Accordingly, the scenario seems fairly bleak for our Lessee. She is simply outnumbered by her co-directors/shareholders and the Freehold Property Management Company’s constitution offers little support to her. Based only on the information available, our Lessee may need to rely on informal methods of persuasion in order to try to get the arrears paid and to prevent them being written off. As ever, this response is based only on the details given in the enquiry and we would require sight of all relevant documentation/information before being able to advise further.
Michael Adamson, Solicitor at JB Leitch