Corporate governance vs leasehold management

I often talk about the different “hats” individuals wear.  This is because an individual can (and often does) have two roles; as lessee and also as a member of a management company.

There are lots of examples of lessee owned and controlled companies; residents’ management companies in tripartite leases, right to manage companies, and lessee owned freehold companies.

These companies are like any other company; their “rules” are their memorandum and articles of association, and the provisions of the Companies Act 2006 apply to them.

Those hat-wearing individuals therefore have two sets of rights and obligations.  One set under the lease in their capacity as lessee.  And a second set in their capacity as member of the lessee-owned company.

In Houldsworth Village Management Company Limited v Barton [2020] EWCA Civ 980, the Court of Appeal were called upon to consider the distinction between an individual’s rights as a lessee and member in the context of whether the individual’s request to inspect the register of members for the company was for a proper purpose.

Together with Justin Bates (of Landmark Chambers) and Alice Richardson (of Trinity Chambers), I acted on behalf of the management company.

 

Requirement to keep a register of members

Section 113 of the Companies Act 2006 requires every company in England and Wales to keep a register of its members.

Whilst there is no prescribed form of register, there’s certain information that must be contained within the register, including:

  1. the names and addresses of the members of the company
  2. the date on which they became a member
  3. the date on which they ceased to be a member

And it’s an offence committed by:

  1. the company; and
  2. every officer in default

if the company doesn’t comply with this requirement.

 

Inspection of the register

Section 114 of the Companies Act requires that a company’s register of member must be kept available for inspection.

Section 116 builds on this, and requires the register of members to be open and available to inspection by its members without charge.

To inspect the register of members, a member must make a request to the company.  Section 116 sets out the information that must be contained in that request.  This information includes, amongst other things, the purpose for which the information is to be used.

Where a company receives a request to inspect the register, it must within 5 working days, either:

  1. comply with the request; or
  2. apply to the Court

Essentially, an application is made to the Court by the company to withhold the register if the purpose for which the inspection is sought is not a proper purpose.

The Court, in those circumstances, has power to direct that the company should not comply with the request.  The Court will make this order if it’s satisfied that the purpose is not a proper purpose.

 

What happened in Houldsworth?

Houldsworth Village Management Company Limited is a residents’ management company.  Under the occupational leases for Victoria Mill it’s required to discharge a raft of management functions relating to the block.  This includes the usual provision of services, repairs, maintenance etc.  As as common practice, it appointed a managing agent to assist in discharging those functions on its behalf.

The leases required each lessee to pay service charges to the management company.

Each lessee was also a member of the management company.  And the company’s board of directors were all members of the company (and by extension all lessees too).

The individual in question, Barton, made a request under section 116 to inspect the register of members.  The purpose behind the request was so that he could seek to persuade the other members to:

  1. support the removal of the current directors; and
  2. support the removal of the managing agents

The management company took the view that the request made by Barton was not for a proper purpose.  This was because the request related to the removal of managing agents.  The instruction (and removal) of managing agents relates to matters of leasehold management, not corporate governance.  Asking for the register for those reasons was an attempt on Barton’s part to further his rights as a lessee, and not a proper exercise of his company law rights.

Accordingly, the management company applied to the High Court for an order that they did not have to comply with the s.116 request made.

The High Court rejected the arguments put forward by the management company.  Accordingly, the management company appealed to the Court of Appeal.

The Court of Appeal’s judgment was handed down on Wednesday.

 

Decision of the Court of Appeal

The Court of Appeal dismissed the appeal.

It was recognised by the Court of Appeal that there is a distinction to be drawn between rights as a member and rights as a lessee.  However, in the context of a lessee owned and controlled company (which exists to provide services under the occupational leases), it’s difficult to draw a dividing line between those matters of leasehold management (ie the discharge of functions under leases) and the governance of the company.

Accordingly, the Court of Appeal decided that seeking inspection of the register of members for the purpose of garnering support to remove the managing agent was a proper purpose for the purposes of section 116 of the Companies Act.

 

Commentary

Although this case deals with section 116 in the context of residents’ management companies, it applies to every company in England and Wales.

In the context of lessee owned and controlled companies, it’s a significant decision, with the Court deciding that the purpose behind a  request under section 116 does not necessarily have to relate to an individual’s interests as a member of the company.

 

 

31 July 2020

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.

Leave a Reply

Your email address will not be published. Required fields are marked *

Name *

Email * Website

Comment *