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News analysis Is my money safe?

In light of the situation at Peverel, ARMA’s David Hewett explains how leaseholders’ money should be dealt with by RMCs, RTMCos and agents

If you live in a leasehold block it is likely that large sums of lessees’ money could be held by your Residents Management Company, Right to Manage Company (which for simplicity, we will refer to as RMCs) or the managing agent. In all cases, under Section 42 of the Landlord and Tenant Act 1987, service charge funds are trust monies and like any trust funds, they must be protected from third parties taking control of them.

RECEIVERSHIP In the case of RMCs it is possible that a large debt, such as legal fees - that is not recoverable as service charges under the terms of the lease - could put the company into receivership and/or liquidation. Or the RMC may get struck off by Companies House for failing to file annual returns/ accounts. As a result, RMCs are recommended to hold service charge monies in a separate, clearly designated trust bank account which is ring-fenced from the company’s own bank account and so does not form part of its assets.


The situation with managing agents is slightly different as they are not normally the trustee of the service charge fund; they are holding the money on behalf of their client (the trustee). Managing agents must therefore to hold such funds in one or more clearly designated client bank accounts so that they are held entirely separate from the agents’ own business accounts. Should the agent get into commercial difficulties and, say, an administrator is appointed, the service charge funds cannot be touched and can only be used for the ‘benefit’ of the lessees under the terms

of the lease. The requirement for agents to hold service charge monies in client accounts is fully spelt out in part 4 of the Service Charge Residential Management Code published by the RICS and approved by the Secretary of State for England under section 87 of the Leasehold Reform, Housing and Urban Development Act 1993. In any management agreement with an agent ARMA recommends that there is a clause saying service charge monies must be held in a clearly designated client bank account.


A limited company that is a subsidiary, is its own legal entity with its own assets and liabilities, quite separate from the group (holding) company. The only legal connection between the group company and its subsidiary is that the group company owns the shares in the subsidiary. So, if the group company gets into financial difficulties and an administrator

is appointed, the subsidiary will not be affected assuming it is itself trading satisfactorily. All that might happen is that the subsidiary is sold off as a whole so the administrator can realise the assets of the group company by selling its shares in the subsidiary to a third party.


If the managing agent does go out of business, what then? First, it has to be remembered that if the service charge funds are held in client accounts then the liquidator effectively becomes the ‘owner’ of the company and the company has a contractual obligation to manage the properties for which it holds service charge funds. The liquidator will not want to incur additional liabilities for breach of contract so will endeavour to manage the properties until

the management function and the service charge funds are transferred to another agent. If the landlord is an outside investor they will have the responsibility of finding the new agent; if it is an RMC then this would fall to the directors. Again, with regard to the management agreement it may be prudent to have a termination clause should the agent go into administration or liquidation.

The important thing is not to

dither. Contact the liquidator, work with the liquidator and take positive action. However your service charge monies are held they will be with a bank which should be covered by the Financial Services Compensation Scheme (FSCS). Should that bank get into difficulties then the FSCS will pay compensation for any one depositor with that bank up to a limit of £85,000. In the case of service charge accounts the limit relates to each leaseholder’s share of the fund.

What does it all mean?

In administration: is when a person, ‘the administrator’, is appointed to manage a company’s affairs, business and property for the benefit of the creditors. The person appointed must be an insolvency practitioner and has the status of an officer of the court. The objective of administration is to: • rescue a company as a going concern; • achieve a better price for the company’s assets or otherwise realise their value more favourably for the creditors as a whole than would be likely if the company were wound up (without first being in administration); or

• in certain circumstances, realise the value of property in order to pay one or more preferential creditors.

A receiver: may take many forms and their powers vary according to the terms of their appointment. An administrative receiver is a receiver or manager of the whole, or most of a company’s property who is appointed by or on behalf of the holders of any debentures of the company secured by a floating

charge. He or she has the power to sell (or otherwise realise) the assets covered by the floating charge and apply the proceeds to the debt owed to the charge- holder. Receivers who are not administrative receivers may be appointed in other circumstances. For example, under powers contained in an instrument or document creating a charge over a company’s property, a receiver or manager may be appointed until the debt is recovered. Receivers may also be appointed under the Law of Property Act 1925.

Compulsory liquidation: of a company is when the company is ordered by a court to be wound up. The High Court, or a county court with the appropriate jurisdiction, may order the winding-up of a company. This may be, for example, on the petition of a creditor or creditors on the grounds that the company cannot pay its debts.

A full explanation of these terms is contained in Liquidation and insolvency GP08 – May 2010 downloadable from 11

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