What happens if the Management Company dissolves?
11th November 2020
11th November 2020
Hopefully this is something that will not be a regular occurrence but given that most management companies appointed under a lease will have lay directors and no income or assets of its own to fall back on in the face of difficultly, this is something that does happen from time to time across any portfolio. Sadly, we do see far more management companies that have ‘gone bust’ than we would like and invariably the poor agent appointed by the management company is left in the unenviable position of sorting out the resulting mess for the lay directors.
So what is the legal position if the worst were to occur?
Bona vacantia and rights and obligations
When a company is dissolved all property and rights that it held immediately prior to the dissolution will become vested in the Crown (unless those rights are held on trust for another entity and in which case different rules will apply).
The above is the principle of bona vacantia.
On dissolution the contractual rights of the dissolved company pass to the Crown bona vacantia. Note however, that the Crown’s role here is undertaken by others depending upon the location of the dissolved company’s last registered office at the time of dissolution. Where that registered office was in Lancashire, some of Merseyside, Greater Manchester, Cheshire and Cumbria then the Duchy of Lancaster takes the place of the Crown. Where that office was in Cornwall then the Duchy of Cornwall undertakes the Crown’s role. The position is essentially the same whether the interests of the management company vest in the Crown or either one of the two mentioned Duchys.
It is worth highlighting that it is the rights of the company that pass but that the company’s obligations do not. This important distinction means that the Crown has no obligation to undertake the duties of the management company including that of managing the building. In almost all cases the Crown would not take on any aspect of the duty to manage and, where it is so inclined, it will disclaim any interest in the lease to affirm that unwillingness to manage the property. The Crown will often disclaim because there is no value in the company’s rights under the lease.
So what happens to the management of the development then?
Most leases that appoint a management company as a party to the lease will include a provision to the effect that the management duties of the management company will pass to the landlord in set circumstances. Those circumstances will often include the dissolution of the management company or, where the management company is in breach of its own obligations, the landlord sees the need to step in. In developments with leases containing such provisions the landlord will therefore take over and management will (should) continue.
However, it is often the case that the leaseholders were members of the now dissolved management company and thus previously had enjoyed control of the management of the building. It is therefore unlikely that they will be happy to allow their loss of control caused by the dissolution of the management company.
In the alternative, if the lease makes no provision for the landlord to step in on the failure of the management company, the leaseholders will want to rectify the position so that their building is once again managed and their investment protected.
The likely best resolution to either of the above scenarios is for the members of the dissolved management company to take steps to have it restored on the register at Companies House. This step should be taken promptly following notice of the dissolution, and certainly prior to the Crown disclaiming its rights. In many cases the Crown will not be quick to disclaim its rights and thus time is often not a significant factor. That said, it is absolutely better to act promptly if restitution is the desired remedy, and in most cases it will be.
Where the company is restored prior to any disclaiming of the rights by the Crown then the effect is that the company is deemed to have continued in existence as if it had never been dissolved at all.
Avoid seeking the wrong solution
This is an issue we do see more often than we would like and it is often expensive to resolve.
Where the management company has been dissolved, be that recently or historically, there is, or certainly from our experience there appears to be, an inclination not to reinstate the original company but to set up a new company to take over where the last one left off. On the face of it that is really simple and cheap route. Just create a new company, call it something similar or a completely different name to the previous and now dissolved management company, and ‘job’s a good’un’.
Sadly though, this is not in any way a solution to the issue because the ‘new’ company is a separate legal entity to the management company appointed under the lease and therefore does not, and cannot, step into the previous management company’s shoes. It therefore has no obligations under the leases/transfers and, importantly no rights or abilities to collect or lawfully spend service charge monies or enforce the lease provisions. It is literally little more than an irrelevant entity (innocently perhaps) masquerading as the management company under the lease.
Other potential solutions
There may be circumstances where it is not appropriate to reinstate the original management company. In that circumstance the leaseholders might explore other options including:-
- Exercising the Right to Manage (if they and the building qualifies);
- Applying for the appointment of a manager; or
- Collective enfranchisement (purchase the freehold interest).
If you or your clients find themselves in a situation where the management company is insolvent, then do seek competent advice before acting.
An application to restore is likely to be the most appropriate course of action in most cases. One of the other potential solutions may be better for a particular client and thus advice obtained should consider which of the various options open to the client best serves them.
There will be a cost, whichever route is pursued, and that will need to be funded by the current participating leaseholders (it is unlikely to be a lawful service charge cost).
The key is to act as quickly as possible with sound advice and get it right.
This legal update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.
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