Corporate governance -v- leasehold management

In this article, we consider the recent case of Houldsworth Village Management Co v Barton which explored when a leaseholder is also a shareholder and the correct approach to requests made to lessee-owned property management companies under s.116 Companies Act 2006.
I often talk about the different “hats” individuals wear. This is because an individual can (and often does) have two roles: as lessee and 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 the second set in their capacity as a 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.

The 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 is an offence committed by:
1.    the company; and
2.    every officer in default if the company does not comply with this requirement.

Inspection of the register
Section 114 of the Companies Act requires that a company’s register of members 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 the power to direct that the company should not comply with the request. The Court will make this order if it is satisfied that the purpose is not a proper purpose.

What happened in Houldsworth?
Victoria Mill is a building in Stockport with 180 residential flats. The flats are let on long leases which are tripartite agreements between the landlord, the leaseholders and the lessee-owned management company, Houldsworth Village Management Company Limited. The management company is therefore a residents’ management company.

Under the occupational leases for Victoria Mill, the management company is required to discharge a raft of management functions relating to the block. This includes the usual provision of services, repairs, maintenance etc. As is 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 section 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 29 August 2020.

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 (i.e. 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.