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Alex J.
Alex J., Solicitor
Category: Law
Satisfied Customers: 3495
Experience:  Solicitors 2 years plus PQE
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What action can I take if a trade association which is a not

Customer Question

What action can I take if a trade association which is a not for profit company limited by guarantee and owned by its members does not follow its own company regulations?
Submitted: 3 years ago.
Category: Law
Expert:  Alex J. replied 3 years ago.
Hi,

Thank you for your question and welcome to Just Answer.

Can you tell me a bit about the regulations it is breaking?

Even if it is not for profit it can still be sued as a limited company. Do you know what level of guarantee the members have offered?

Kind regards

AJ
Customer: replied 3 years ago.


Hi AJ,


The association has broken several of their own regulations. The dispute arose in May last year when I received their accounts for the year end Dec 31st 2011 which showed them to be on the brink of insolvency. The notification of the AGM was late and did not comply with the regulations or the Companies Act. I requested further information about the financial state of the organisation including reassurance that they were currently solvent. They refused to answer these questions so I submitted a resolution for the AGM proposing that they produce interim accounts for the first half of the next financial year which would end in June 2012. On receipt of this resolution they suspended my membership accusing me of abusing my membership. There are defined proceedures for discipline of members in the company regulations which they did not follow. Membership also inculdes professional indemnity insurance and the suspension of membership meant I my insurance was not in place. I pointed this out to them and they reinstated my membership but advised that I would face a disciplinary proceedure. My resolution was not seconded at the AGM and they refused to vote on in. They also did not record the resolution in the AGM report that they made available for members. I then received an email around September saying that no further action would be taken. However, they wrote to me again in November 2012 advising that the board would not accept the renewal of my memberhisp when it became due in March 2013. This was also in breach of the compnay regulations that allows members to represent themselves if there is a disciplinary procedure. I gave a full response to the letter advising that they were not following the proceedure, and also pointing out that I had not breached any of the rules of the association. I did not get a response to my letter so followed up with a letter to request a response in December. Their response was a simple two line answer to say that the Board considers the matter closed. I asked for clarification pointing out that this coudl either mean that they would not accept my renewal in March 2013 or that they had accepted that they had acted contrary to the regulations. I have not had a reponse and have written today to the Chairman asking that she investigates my complaint. There is provision in the regulations to get arbitration if a dispute can not be resolved.


I am concerned that they will still not respond to my correspondence, hence my question, what can I do to force them to follow their own regulations.


The level of gaurantee the members have is £1.


I look forwrad to your reply

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

So to clarify you are seeking an AGM (being called at your request in accordance with the company constitution) so that the board can explain their accounting policies?

Kind regards

AJ
Customer: replied 3 years ago.


HI AJ,


I would like them to explain their accounting policies and clarify the state of the finances but I don't necessarily want to call an AGM or even an EGM. To call an EGM would require me having to get other members involved. I also want them to explain why they suspended my membership in contravention of the regulations and acknowledge that submitting resolutions for AGM which asks them to clarify the solvency of the company is not an abuse of membership. I want them to accept my membership renewal when it becomes due in March, and if necessary force them into arbitration in accordance with the company regulations.


If they ignore my correspondence or refuse to go to arbitration, or allow me to renew my membership, what steps can I take?

Expert:  Alex J. replied 3 years ago.
Hi

Thank you.

I will go and draft a response and post it as soon as possible.

Please do not be concerned if you do not hear from me right away.

Kind regards

AJ
Customer: replied 3 years ago.
Great. I look forward to hearing from you. Paul.
Expert:  Alex J. replied 3 years ago.
Hi

Thank you for your continued patience.

I have drafted a response I am currently have some connection problems so I will need to post when I have access to a PC. That will be tonight or tomorrow morning at the latest.

Kind regards

AJ
Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

I will need you to tell me a little more about the arbitration clause does it relate to disputes between the directors and sharheolders?

I will summarise the position below:

1. The Law
- S.172 of the Companies Act 2006 prescribes various obligations on Company Directors including the obligation to act in the Company's best interest and for the benefit of its members as a whole.
- S.386 of the Companies Act 2006 requires directors to keep accurate accounting records - failure to do this is an offence.

2. Application
- By failing to keep accurate records and trading the company while insolvent the directors would clearly be in breach of the above sections.
- If they file annual accounts you will be able to verify this further and confirm whether they have falsified any records.

3. Remedy.
- You could use the company articles to seek a general meeting in order to vote the directors off the board - I would need you to check the articles and confirm whether there are any provisions for member forcing a general meeting;
- Under S260 of the Companies Act 2006 you could bring a derivative claim for unfair prejudice of a minority shareholder (See. S.994 of the Companies Act) - this would be on the basis that your interests are being prejudiced on the basis that the company is being run on an insolvent basis.
- Unfortunately there is no specific right to demand inspection of the Company Accounts - you may need to wait until the next statutory accounts are filed to get sufficient evidence of unfair prejudice. It may therefore be best to seek the removal of the directors if you can garner the support?

I look forward to hearing from you.

Kind regards

AJ
Customer: replied 3 years ago.


Hi AJ,


 


I can send you their Mem and Arts but I don't really want to go down the path of calling an EGM as a) this would involve recruiting other members to support it and b) there is such a degree of apathy within the association that they will be able to get enough proxy votes to defeat a resolution to remove the board.


My original question was in relation to the board breaching the company regulations. I have attached the company regulations, and I have indicated below where they have breached the regulations in my case.

Attachment: 2013-02-04_134338_rules-and-code-of-ethics.pdf


I have written and asked that the Chairman investigates my dispute under regulation 3H and pointed out the provision for arbitration of it could not be resolved. My worry is that they will ignore this letter as they have done with previous correspondence.


So what legal action can I take to force them to follow the regulations?


 


Summary of regulation breaches:


1.


Regulation 4D – Company Secretary did not provide financial accounts and AGM agenda at least 21 days before the AGM


 


2.


Regulation 9C – Unless in emergencies, Council meeting require at least 14 days notice. I submitted a resolution to the AGM on 24/5/12 and membership was suspended the next day on 25/5/12. If the company was solvent, then the resolution could not be considered to be an emergency. Therefore the council meeting that suspended my membership was no correctly convened


 


3.


Regulation 3E –No member shall be suspended or expelled without being first summoned before the council and being given a full opportunity to put his/her case with the assistance of a representative if required. My membership was suspended on 25/5/12 without being give the opportunity put my case to the council.


 


4.


Regulation 3B – Council may order immediate investigation of any member whose conduct is in conflict with the rules, and who after written warning to refrain from such conduct persists therein. There was / is no conduct issues and no written warning was given.


 


5.


Regulation 3C – If an investigation did take place, I was not a) notified in writing of the findings of the investigation immediately after any discussion of it by the council, b) invited to give a written response within 21 days and c) notified within 14 days


 


6.


Regulation 3D – No notification was provided that a hearing was warranted – 21 days notice required.


 


Possible future breach


Regulation 3H – If a member has a dispute or grievance other than a result of a disciplinary procedure she can refer it to the Chairman who should investigate and try to resolve it. If after investigation the member remains dissatisfied, it can be referred to arbitration.


 


Regulations BABTAC say it is has applied but which are disputed:


Regulation 2D – Council shall have the right to refuse an application for membership and may in its absolute discretion decline to give a reason. The council shall also have the right to refuse to renew membership in the event of adverse claims. Original membership application was approved 30 years ago – not insurance issues therefore no right to refuse to renew membership.

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

I note the content of these regulations, but please consider the following point - these regulations form part of the Company's constitution? If the directors deliberately ignore these regulations then they are acting Ultra Vires and contrary to the Company's constitution.

If the directors act in breach of the company's constitution then they are also in breach of their powers under S.172 of the Companies Act. The remedy for such a breach would be a derivative action under S.260 of the Companies Act 2006. As a starting point you could write to the directors in the following terms:
1. Remind them of their duties under S.172 of the Companies Act and specifically their duty to act within the best interest of the company;
2. Say that if they do not remedy their breaches of the Company constitution/regulations you reserve the right to take further action against them including the right to bring a derivative action;
3. Say that continuing to trade the company insolvently will only put them at personal risk.
4. Give them 7 days address your complaint in accordance with regulation 3H at which point you will seek arbitration of the matter.

If they ignore you, you will have to consider either court action or garnering support of your fellow members in order to over throw the board.

I look forward to hearing from you.

Kind regards

AJ

Customer: replied 3 years ago.

Hi AJ,


 


Thanks for that. Looking into taking action under S260 suggests this is relatively new and untested. Would a petition under S994 be more appropriate and more likely to succeed?


 


Paul

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

There are merits for both applications:
1. S.260 on the basis that the directors are in breach of their duties by acting Ultra Vires;
2. S.996 on the basis that you are being denied due process under the company constitution and this would count as an unfair prejudice.

I would personally think S.260 is a better prospect because the root of this issue is the directors' behaviour. You are also more likely to garner support from your fellow members which would hopefully end the issue before it escalates.

Kind regards

AJ
Alex J., Solicitor
Category: Law
Satisfied Customers: 3495
Experience: Solicitors 2 years plus PQE
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Customer: replied 3 years ago.


Hi AJ,


 


One more quick question. Is there a process for forcing the company into administration due to the behaviour of the Directors? My thoughts are that we could threaten to sue unless they resign and put the company into administration pending the appointment of a new board or Directors.


 


Best regards,


 


Paul

Expert:  Alex J. replied 3 years ago.
Hi

Thank you.

Administration is an insolvency procedure it can only be instigated by a floating charge holder or a director.

If the relationship has broken down that badly and the directors are guilty of not behaving correctly then I would just seek to remove them and hold them to account for the damage caused.

Appointing an admin is incredibly expensive and I doubt it would serve your purpose in this circumstance.

Kind regards

AJ
Customer: replied 3 years ago.


Hi AJ,


 


How about threatening to sue the Directors under S260 as you suggest unless they agree to resign immediately and call an EGM to appoint a new board?


 


If the Directors were to resign immediately, who would be responsible for running the company in the three weeks or so it will take to provide notice for an EGM?


 


Paul

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

You cannot take that action as it is akin to blackmail. You can invite them to leave amicably.

Really they should only reason at the EGM so the company is not in a position where by it has no directors. Having no directors will make the company liable for a fine from the secretary of state.

Kind regards

AJ
Customer: replied 3 years ago.


So we point out their various breaches and advise them that action could be taken against them for these breaches if they continue as Directors.


 


We then suggest / invite them to call an EGM to appoint a new board, and resign immediately afterwards.


 


Would that work?

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

Personally if you want them gone is you gather together at least 51% of the voting members and you invite the directors to resign. If they do not you can then forcibly vote them out by ordinary resolution (subject to what it says in the articles of association).

Kind regards

AJ
Customer: replied 3 years ago.


I understand what you say. We could try to get them out by getting enough members toegther, but there are two problems here:


a) I don't have the contact details of the other members


b) most of them are appathetic and so getting support from 51% of them might be difficult.


 


But maybe we could use this as another reason to pursuade them to go willingly rather than being forced, ie


 


1. We point out that they are in breach of their duties.


2. We invite them to call an EGM and resign


3. If they don't do this, we will use the threat of calling the AGM ourselves and going to the members as you suggest.


 


Paul

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

At this stage I would not threaten anything.

Start by seeing if you can get them to commit or outline in writing what their proposals are for properly administering the company in the future. If they do not come up with adequate responses then tell them you believe they may be in breach of their duties. In this circumstance actually using S.260 should only be a very last resort if they have been so negligent as to have caused the company loss.

If they cannot give you reassurances ask them to offer their resignation. If they do not then you can seek to remove them forcibly by ordinary resolution.

Kind regards

AJ
Customer: replied 3 years ago.


I understand what you are saying. However, the problem is that we have already gone past the stage of trying to get them to respond to us amicably. I last wrote to them almost 2 weeks ago asking for the chairman to investigate my complaint under regulation 3H of the rules which says I can refer disputes to her. I gave her 14 days to reply and that runs out in 2 days time. I'm not hopeful she will reply. So I think we have exhusted all reasonable attempts to communicate with them hence my original request which was what legal action can we take to make them respond. Unfortunately, I do not beleive they are taking legal advice themselves, or if they are, they are ignoring it.


I feel that unless there is the threat of possible legal action they will continue to ignore us. I also think that that threat has to come from a solicitor in order for them to a) take notice and b) get some legal advice themselves.


What do you think?

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

Certainly a letter from solicitor will have more gravitas. Why dont you line up a local solicitor now to write the letter so it arrives immediately after the 14 day deadline has expired - you can certainly mention in the letter what the failings of the directors are.

Kind regards

AJ
Customer: replied 3 years ago.


That's exactly what I've done! I've got an appointment tomorrow.


 


Thanks for all your help - excellent service!

Expert:  Alex J. replied 3 years ago.
Hi,

No problem.

I wish you the best of luck.

Kind regards

AJ

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