If you’re a leaseholder retiring as the director of a company set up to manage your block of flats, how do you protect yourself from any potential legacy liabilities? Right to manage (RTM) and Resident’s Management Companies (RMCs), as well as collective enfranchisement companies set up for the purpose of leaseholders buying the freehold of their property, are limited liability companies.
If errors and mistakes are identified as being made during your tenure as a director, then any liabilities could follow you even after you retire, and even if you have moved away.
So when you are ready to pass the baton, be sure to follow the correct procedures for a clean break and check that the building’s directors and officers liability insurance1 is either a) being renewed; and/or b) that the policy in place while you are an active director has a long tail.
In practice, most policies will allow up to six years’ grace so, if the management company decides not to renew or moves the policy to a new provider, the old policy will continue to protect retired directors who were in place at the time it was in force for actions they took at that time.
What can go wrong?
While your role as a director is voluntary, and your block of flats management company meetings may be among friends with a common interest in the building you live in, you do need to maintain a degree of formality when it comes to running the company.
Failure to follow consultation processes, where necessary (for major works2 etc) or to keep proper records, could result in time-consuming disputes with other neighbours.
Failure to maintain and file accounts on time can even lead to the company being struck off, with all the administrative hassle and expense that rectifying the situation involves.
Imagine how other leaseholders, who had been through the process of claiming the Right to Manage would feel if block management reverted to the landlord? Legislation allows this if the RTM Company ceases to exist. If your neighbours felt the value of their flat was affected, or that the costs of reinstating the company were unreasonable, they may need to sue the Directors for costs.
Directors’ and officers’ liability insurance3 – also known as D&O insurance – usually covers the cost of compensation claims made against your business’s directors and key managers (officers) for alleged wrongful acts.
Examples include breach of trust, breach of duty, neglect, error, misleading statements, and wrongful trading.
You don’t even have to do things wrong deliberately to fall foul of the law. It can be a genuine error, but leasehold law is complex and mistakes are easily made. After all, directors are often volunteers and laymen.
This is why leaseholders increasingly agree to take out, and share the small cost, of Directors and Officers Liability insurance. Policies specifically written for blocks of flats are very affordable. They can protect volunteer directors from personal liability, and even potential financial ruin, should they make an error. And, of course, it also makes it easier for individual leaseholders to sue for any unaffordable losses they have incurred without worrying about the personal impact on their director neighbours.
Acting as a director of a residents’ management company (RMC) a right to manage company (RTMCo) or a collective enfranchisement company is a big responsibility and hopefully your neighbours appreciate the time and effort you put into it. We describe the different types of company here4. When the time comes for you to move on, you should follow formal procedures to resign as a director. This is in fact quite a straightforward process.
Articles of Association (articles) for RTMCos were specifically prescribed by law when the concept of an absolute right to manage was introduced nearly two decades ago now, and the company won’t be valid unless they are in the correct form. If you are a director of such a company, be aware that the articles will include the correct procedure for appointing and terminating directors.
An RMC or a collective enfranchisement company set up especially for the purposes for buying the freehold will probably have articles specifically written for that building, and you should check these when you are ready to retire as a director in case there a specific requirements of retiring directors
Normally your first step is to put your intention to resign in writing and give a copy of this to the remaining directors. You do not have to give a reason for your resignation, however, you must make it clear that you are leaving the company along with the date this is to take effect from.
Once your resignation has been accepted by your fellow directors, a TM01 form should be completed and sent to Companies House who will remove your name from the records they hold on the company.
At this point your liabilities are over as far as the company is concerned. You can only be held responsible for things that happened (or did not happen) during the time of your directorship. As long as you did not act outside of the law whilst in your post as director, you are free to walk away from the company for good.
Before you go …
A small vote of thanks from all of us at Deacon to all the directors managing blocks of flats who choose Deacon for their buildings insurance. Your professionalism at keeping the nation’s blocks of flats functioning help make our life easier. It’s a pleasure working with you!
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.