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Alex J.
Alex J., Solicitor
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Legality of Payments by a Company

Customer Question

Attachment: 2014-01-18_191704_memorandum-1.pdf

Attachment: 2014-01-18_191758_agreement-1.pdf

I am a resident in a development that has a residents' company that is responsible for the maintenance of various common areas arond the development. Thirty-two Householders on the development are shareholders and pay an annual maintenance fee of £204.00. The company has no assets apart from a "sinking fund" of a few thousand pounds that has been accumulated to meet potential large expenditures in the future - in particular there is a track on the site that need re-surfacing every ten or so years. Recently there has been a proposal to develop adjoining land, and although a formal Planning Application has not yet been lodged with the District Council, residents are concerned and a working group has been formed to oppose the application when it is made. The working group has approached the Residents' Company and asked for the Company to fund the employment of a planning consultant to assist in preparing the case against the development. I am concerned that this expenditure would not be in accord with the purpose of the Company and not allowed by an Agreement (a Deed) between the Company and the householders. The Memorandum and Articles of Association are pretty open-ended (I imagine they are fairly standard set used for setting up off the shelf companies) and allow the directors to do pretty much anything; however the supplementary "Agreement" sets out very definite responsibilities for the Company and the householders. The responsibilities of the Company are primarily limited to the maintenance of the common areas. I therefore believe that the directors,of which I am one, would not be permitted to use the Company's funds to pay for a Planning Consultant. I would welcome a professional opinion. Copies of the Memorandum and Articles of Association and the Agreement are attached. Many thanks.

Submitted: 2 years ago.
Category: Law
Expert:  Alex J. replied 2 years ago.
Hi,

Thank you for your question and welcome.

My name is AJ and I will assist you. I am a company law expert.

I will need to review these documents and will do so and revert to you by tomorrow, in the mean time can you confirm that if needed support of the shareholders could you garner 75% of their support?

Kind regards

AJ

Customer: replied 2 years ago.

Thank you for getting back to me so quickly. I think that there is general opposition to the housing development as initially outlined by the developer, however until a Planning application is tabled no one knows what they are opposing. If the scale of development is scaled back then it could be that some of the residents will accept that, although they do not want any development, a limited development is worth accepting.


 


I suspect that most (>75%) of the residents would be prepared (leaving aside the question of the legality or otherwise) to see a modest amount of the Company's funds spent in employing a Planning Consultant and so far the Working Group has requested about £2,500 (2 days work) plus unspecified consultant's expenses; this is about 15% of the Company's funds and would, I suspect, be acceptable to over 75% of the residents in that they would rather see money come from the Residents' funds than have to contribute directly to a fighting fund to oppose the development fromtheir own pockets. However, if there were further requests for more funding, I suspect that support would wane rapidly especially if we needed to increase the annual maintenance fee. I am concerned that requests for further funding will be made and if a precedent is established it will difficult to decline these further requests. The "Agreement" was signed by all shareholder householders when it was created and I believe it was designed to ensure that money was spent on very specifically to maintain the common areas, provide insurance etc as specified and so prevent some of the sorts of expenditure that are permitted in the Memorandum & Articles, e.g. pensions for directors, advancing loans. It was difficult to get everyone to sign up to the Agreement initially, I suspect that it would be even more difficult, if not impossible, to get everyone to enter into a new or revised agreement.


 


So, not a short reply to your question, but a qualified "yes".


 

Expert:  Alex J. replied 2 years ago.
Hi

Thank you.

I am reviewing the documents now but have to go out in an hour or so, I will post a response by this evening.

Kind regards

AJ
Customer: replied 2 years ago.

Many thanks for letting me know.


 


Regards


 


David

Expert:  Alex J. replied 2 years ago.
Good evening,

My apologies for the delay.

I have written a response and it is on my PC. My internet connection has just gone down if I do not post it tonight I will post it first thing in the morning.

Kind regards

AJ


Expert:  Alex J. replied 2 years ago.
Hi,

Thank you for patience and I apologise for the delay.

If i deal with each point in turn:
1. The memorandum:
- This is a standard memorandum that contains objects of a company that most companies formed after October 2009 are not actually subject to anymore;
- The power of the Company to expend the money probably falls under objects 3 (iv) and/or (v);
- If the money has been properly collected then the directors as agents of the company have the power to spend it.

2. The agreement:
- The agreement contains positive obligations on the Company there is no negative obligation preventing it from doing something.
- These obligations are contained in Schedule 2 (and in part Schedule 4). I cannot see here a negative obligation preventing the company from expending money on a Planning Consultant, if the employment of that planning consultant is in the best interests of the Company and vicariously the best interests of the Estate as a Whole then the directors should have the power to do it.

3. Decision Making:
- This is obviously a concern for the directors as they a) do not want to be criticised and b) do not want to incur any personal liability for breaching the terms of the agreement or their authority under the company constitution;
- Therefore the best way to deal with this in order to protect the directors is to circulate a written resolution and get the shareholders/householders to approve the employment of the Planning Consultant from company funds.
- Just as a side point I would note the directors do have an indemnity for their acts under Article 17 which may give some comfort if you do not wish to obtain shareholder approval.

I look forward to hearing from you.

Kind regards

AJ
Customer: replied 2 years ago.

AJ,


 


Thank you for your response. I've been busy at work and have not had an opportunity to look at properly until now. I do have a couple of points that I would like you to comment on.


 


I take your point that the “Agreement” sets out positive obligations rather than negative obligations; however could it not be construed as setting out an exclusive set of obligations? Given the open-ended nature of the Memorandum and the extensive powers it allows to the Directors, I suspect that many Shareholders who signed the Agreement felt that its intention was to set a limit on what the Directors could do and provide a safeguard that expenditures would be tightly governed.


 


You cite Object 3.(iv) as probably allowing the employment of a Planning Consultant. It think that this should be 3.(a)(iv). However this clause specifically allows the Company to “to provide services of every description in relation to the Estate…..”. The land that might be developed adjoins the “Estate” but is not part of it, so could it be argued that the planning consultant is not providing a service in relation to the Estate?



Object 3.a(v) is to do with insurance, so I am unclear that this clause could allow us to employ a planning consultant, but Object 3.(a)(vi) allows the Company to “deal in and with such moneys not immediately required in such manner as may from time to time be determined” which on the face of it would cover pretty much anything I imagine. Although it is in the context of the funds being accumulated to meet “fees, costs, and other expenses incurred in the implementation of the Company's objects” and the Objects are all to do with the “Estate” and that does not cover the piece of land that might be developed.



I would appreciate your thoughts.



Regards



David

Expert:  Alex J. replied 2 years ago.
Hi,

Thank you.

I am re reading the Agreement now and will revert to you shortly.

Kind regards

AJ
Expert:  Alex J. replied 2 years ago.
Hi,

Thank you.

I would agree that the Agreement and Constitution safe guards how the directors expend company funds however this is not necessarily binding on a third party.

If the company incurs a liability to a third party then the company is liable to pay that liability from its assets. The fact that the directors should not have allowed the company to incur that liability in the first place is a different matter altogether and potentially the directors could be personally liable for that.

If you look at Clause 4 of Schedule 2 it says 4. "The Company will pay all outgoings of whatsoever nature relating to the Common
Property" - this is a nod to the fact that the company is a separate legal entity. Therefore it has its own liabilities and assets. The problem is a company can only act through its appointed agents, ie its directors. A directors power is derived from the shareholders (in this case your agreement) and constitution. If the directors act beyond their power and bind the company, under the laws of agency "ostensible authority" applies to bind the company to its act with third parties. The director however may still be liable to the company and shareholders for acting "Ultra Viries" i.e beyond its power.

That is why in my opinion if the directors get the approval from the shareholders to spend these funds, then should not be held liable personally and the company will have committed a valid act.

Kind regards

AJ
Customer: replied 2 years ago.


Alex,


 


Thank you for responding to my queries.


 


My interpretation is that if the Directors were to spend money on the services of a Planning consultant, without prior approval of the shareholders, then they would be (could possibly/probably? be) acting “ultra vires”, i.e. beyond their power and potentially could be held to be personally liable for the expenditure incurred.


 


However if the directors do obtain the approval of the shareholders then, as you say, they should not be held liable personally and the company will have committed a valid act. Obtaining such approval would effectively over-ride the limitations set by the Agreement and/or the Memorandum.


 


Is this interpretation correct and is it a “would” or “could possibly” or “could probably” in the paragraph above?


 


You asked whether 75% of shareholders would be likely to support using company funds to fund the planning consultant, so the question arises, if we ask for the approval of shareholders, do we need:


 



  • - A simple majority (>50%) of those who respond.


or


 



  • - A simple majority (>50%) of all of the shareholders


or


 



  • - A greater majority (>75%) of those who respond.


or


 



  • - A greater majority (>75%) of all of the shareholders.


I think that we would be foolish not to follow your advice and seek approval from Shareholders, the development is fairly small so I imagine that we will deliver a letter by hard copy to all shareholders (some shareholders do not use email) and back that up by an email copy. The following questions arise:


 


 





    • - Can we accept email returns?



  • - What length of time would it be reasonable to allow for responses? I am not aware of anyone being away from home but I suppose some people might be taking holidays.

  • - We have one shareholder in Australia, would an email followed up by hard copy be sufficient to start the clock ticking for period allowed for responses.


Many thanks for all you help. I look forward to hearing from you.


 


Regards


 


David

Expert:  Alex J. replied 2 years ago.
Hi,

Thank you.

What you are proposing is an amendment of the company's memorandum and articles and/or approval of a directors action. This requires a special resolution which is a 75% majority. An approval with 75% majority would definitely allow the directors power to make this expenditure under the articles.

The individuals are not party to the agreement in their capacity as directors therefore I think you can rely on the company's power to expend this money under Schedule 2 Paragraph 4 of the agreement if it has shareholder approval.

As you will be voting by special resolution you will need to give at least 21 days notice of the meeting.

Strictly speaking you have table A articles of association as amended. Therefore electronic is not strictly allowed. However S.298 of the Companies Act 2006 potentially over rides this. I however would not take the risk. What I would do is serve all shareholders with notice of the meeting at their given address and by email as well and ask if they want service by email in the future. You can then allow them to respond by email as well.

There is something under Company law called the Duomatic Pinciple which forgoes the formality of company administration in certain circumstances. While technically you might be able to get away with email communication, I would not risk an argument over it and wait until you have updated the articles and enshrined the right to use email in the articles.

You may be able to get away with less than 21 days notice if you use a written resolution, but I think it would be better to hold a general meeting and let all the residence have their say before putting it to a vote. That way it is very public and open and the directors cannot be criticised.

Kind regards

AJ

Expert:  Alex J. replied 2 years ago.
Hi,

Can I be of any further assistance with this?

Thank you

Kind regards

AJ

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