Essential factors to consider before becoming a director of a property management company

For the purpose of this article, the term “property management company” is used to refer generally to any type of company that has been incorporated (for example by a developer) for the purpose of managing communal areas of a site, development and/or building where the residents are typically the members (or shareholders) and usually the directors as well.

Whilst by no means exhaustive, here are some areas that you may find useful to consider before coming to a decision.

1. You will be bound by the statutory director duties

Many property management companies rely on the residents becoming directors and, in some (though not all) cases, those individuals will have little or no prior experience and/or knowledge of the director duties imposed by the Companies Act 2006 (and common law in certain instances).

It is important to understand that, if you are appointed as a director of any company (property management companies included), you will assume significant legal duties and potential personal liabilities. You will be subject to the statutory director duties from the moment you are appointed. It is therefore good to make sure that you are familiar with what these duties are so you can consider them to make sure you will not have any issues complying with them.

Whilst there are other duties that apply to directors, for the purpose of this note, we flag the following from section 171 to 177 of the Companies Act 2006, which are that a director of a company must:

• act within their powers;
• promote the success of the company for the benefit of its members (shareholders) as a whole;
• exercise independent judgment;
• exercise reasonable care, skill and diligence;
• avoid conflicts of interest;
• not accept benefits from third parties; and
• declare certain interests they have in a proposed transaction or arrangement with the company.

Always remember that ignorance of the statutory duties governing directors is not an excuse and they will apply to you from the moment you are appointed. Directors are required to keep themselves informed about the company's affairs and to take an active interest in them. You should therefore only ever consider becoming a director if you are certain that you will be able to remain actively involved with the company’ affairs for the duration of your appointment. 

2. Personal liability risk

Directors of property management companies, like all company directors, face potential personal liability in certain circumstances. Whilst this is not common, and usually only arises in the case of wrongful or fraudulent trading, it is still worthwhile to know that, in a worst-case scenario, you may become personally liable if you have acted dishonestly (or grossly incompetently) in certain circumstances. This is not to suggest that you will deliberately consider acting dishonestly or incompetently but it is just another reason to pause and make sure that you are comfortable that you have the required skills, expertise and capacity to operate the company in the manner required to discharge your statutory duties so as to avoid any risk of personal liability arising.  

3. Who are the other directors

You will need to work with the other directors – even if the property management company engages a managing agent to carry out the day-to-day running of the company – so you should find out who the other directors are and be comfortable that you will be able to work collaboratively with them. Also, are there any ongoing disputes between the current and/or former directors? You may not want to be appointed whilst there is an ongoing dispute.

4. Existing articles of association

It is always a good idea to review the company’s existing articles of association to familiarise yourself with their terms. Remember that, if appointed as a director, you will need to conduct company matters in accordance with any applicable provisions in the articles, so make sure you are happy that the articles do not contain any provisions which may make the running of the company overly onerous or too difficult in practice. Some management companies may have been formed some time ago and their articles may be outdated and require updating. If you notice this before you are appointed as a director, you can then find out what the process (and appetite) is from the other directors on how they can be updated. You can then ascertain whether you have sufficient capacity to take on the role as director and deal with such matters.

In case you are not familiar with the term, a company’s articles of association is one of the chief constitutional documents of a company which sets out the basic management and administrative structure, and regulates the internal affairs, of the company.

5. What responsibilities does the company have

It is a good idea to get an understanding of what contracts and/or arrangements the company is party to before you are appointed. It is very common for property management companies to appoint a managing agent to deal with the day-to-day running of the company, but you will want to satisfy yourself that you know whether there are any services and/or commitments that the board of directors need to undertake directly, i.e. things that a managing agent will not provide as part of their services. The point being that you want to know exactly what commitments you will be taking on as a director so you can satisfy yourself that you will be able to discharge these sufficiently as part of your role.

6. Insurance

Ideally, you should only become a director if the company has sufficient insurance policies in place that adequately cover the various risks and liabilities that the directors could face. You should check what policy (or policies) are already in place to make sure you are happy with the cover provided (and raise the point about additional / further / more comprehensive cover if you feel the existing insurance arrangements are insufficient) and you should also check the company’s articles of association to make sure that they make adequate provision for the company to maintain adequate insurance cover in place for the benefit of the directors. 

If you are considering becoming a director of a property management company and require assistance, or would like to discuss any aspect of the process, please feel free to get in touch with Matthew Lewins from our Corporate team on matthew.lewins@thackraywilliams.com