Recruiting and retaining directors for residential management companies (RMCs) could become more difficult. Acting as a director of a company set up to manage your block of flats already exposes unpaid volunteers to personal legal liabilities, and these could become more onerous as building safety legislation is reformed and blocks could be required to have named people taking overall responsibility for safety.

How do you protect yourself from any potential legacy liabilities? Right to Manage companies, RMCs and collective enfranchisement companies set up when leaseholders buy the freehold of their property, are limited liability companies. Directors may be unpaid, but they are still liable in law for their actions and can be held personally liable for errors.

Most blocks will agree to provide the protection of Directors’ & Officers’ liability insurance for the other residents who kindly act as directors, usually with all leaseholders paying a share of the premiums through the service charge.

What can go wrong for directors?

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 works, 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?

If your neighbours felt the value of their flat was affected by such errors, they may have no choice but to sue the directors for costs.

Directors’ & Officers’ liability insurance – also known as D&O insurance – can cover the cost of compensation claims made against your block’s directors and key officers. These could include breach of trust, breach of duty, neglect, error, misleading statements, and wrongful trading. Leasehold law is complex and mistakes are easily made.

D&O policies like ours, 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. On the other hand, it also becomes easier for individual leaseholders if they have to sue for any unaffordable losses incurred as they won’t risk personally bankrupting the directors.

Retiring as a director

A completely clean break is not always possible. If mistakes were made during your tenure as a director, then any liabilities could follow you even after you retire, even if you have moved away from the building.

Check that the Directors’ & Officers’ liability insurance policy in place while you are an active director has what is known as a long tail.

In practice, most policies will allow up to six years’ grace so, even if the management company decides not to renew or moves the policy to a new provider, the old policy may continue to protect retired directors for the consequences of their actions.

You also need to be sure you have no responsibility for what happens after you step back, so be sure to follow formal procedures to resign as a director. This is in fact quite a straightforward process.

Articles of Association (articles) for Right to Manage Companies were specifically prescribed by law when the concept of an absolute right to manage was introduced nearly two decades ago, and they include the correct procedure for appointing and terminating directors.

An RMC (Residential Management Company) or a collective enfranchisement company set up specifically to buy 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 are specific requirements.

Normally your first step is to put your intention to resign in writing, stating the date your resignation is to take effect from, and give a copy of this to the remaining directors. Once your resignation has been accepted by your fellow directors, you can complete a TM01 form and send it to Companies House who will remove your name from the records they hold on the company.

From this point you can only be held responsible for things that happened during your directorship.

Finding suitable insurance with Gallagher

As well as Directors’ & Officers Liability Insurance, we can also help find you suitable Blocks of Flats Insurance.

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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 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.