What happens to service charges if management company goes insolvent?

What happens to service charges if management company goes insolvent?

10:06 AM, 7th December 2021, About 3 years ago 12

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I own a flat in a block of 20 flats, where the leaseholders jointly manage the flats under a management company. All the leaseholders are directors in the management company.

One of the leaseholders is suing this management company (for disrepair and consequent loss of rent) and though we have made an offer to address the repair issues by raising more funds in the near future (roughly £150k), we might still be sued for loss of rent (£60k). The management company have £50k in our service charge account at the moment. Service charges are kept in a trust account, and ours has been as well.

If we lose this case as we don’t have funds to defend ourselves, will that mean we will lose £50k that’s there?

It sounds very unfair to me, but not sure what the law says about this?

How are service charge funds treated under insolvency laws if the management company goes insolvent because it’s unable to defend itself in a legal case?

Only the company is being sued, not individual directors. We have directors liability insurance, but nothing more, unfortunately. The cost of repairs will be so high (something we have to do anyway for all of us), that we will not have any additional funds to defend ourselves.

Does anyone have similar experience or knowledge of the laws on this matter?


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11:02 AM, 7th December 2021, About 3 years ago

I have no knowledge in this area, but what if all the other leaseholders sue the management company for the same claim, then if the management company loses, each leadholder would be awarded an equal share? Just a thought.

Mike in Worthing

11:40 AM, 7th December 2021, About 3 years ago

The £50k is safe because your management company is the trustee for the beneficiaries (the leaseholders). It does not own the money.
If you have no funds to pay compensation (should that be the case) the company is insolvent. What you do then is another problem.
See Landlord & Tenant Act (1987) section 42


13:30 PM, 7th December 2021, About 3 years ago

Has the management company instructed solicitors to deal with the claim by the other leaseholder? Have any proceedings been properly responded to? Are you sure that all the other leaseholders are directors of the management company - the more usual arrangement is that each are shareholders of the freehold owner and only a few are directors of the management company? Is the management company also the freeholder? This is important as if it is and becomes insolvent you may all lose your freehold rights. If you need advice re insolvency I recommend Asher Miller of David Rubin and Partners (I have no interest in that firm but know them to be very good from introducing others to them).


13:48 PM, 7th December 2021, About 3 years ago

is the block not insured? have you checked whether legal fees are covered as part of the block insurance?

if/when the particular leaseholder issues summons, a defence should be filled in, or are you simply going to give up on defending the case.

does the insurance policy of the block cover for loss of rent?

too many unknowns at this stage to provide a more reasoned response

rita chawla

13:59 PM, 7th December 2021, About 3 years ago

Reply to the comment left by Mike in Worthing at 07/12/2021 - 11:40
Hi Mike, Though the housing act mentions service charge being in trust fund, it doesn't explicitly say if that will be considered management company's asset if it goes insolvent. I know that is the case for personal bankrupties but wasn't sure for company insolvency. Is the anywhere in insolvency act that has been explained? Thanks Rita

rita chawla

14:02 PM, 7th December 2021, About 3 years ago

Reply to the comment left by Smartermind at 07/12/2021 - 11:02
That thought did occur to me as technically a few other flats are suffering from same issue (including myself), and while the rest of decided to raise funds over time to repair, this particular leaseholder being from legal background himself, decided to sue the management company.


14:09 PM, 7th December 2021, About 3 years ago

is the management company a separate legal entity/company from the freeholder? if it is, the maintenance fund is safe, as the management company who presently holds the funds is acting obo the freeholder and if successful, the leaseholder obtains judgment against the management company, it is it who would have to pay the ccj

if it is one and the same, and lets say the freeholder doesn't have funds to satisfy the ccj, then the creditor would have to do a creditors compulsory liquidation which costs several £££ and potentially he would ask the insolvency practitioner to sell off the freehold

Mike in Worthing

14:26 PM, 7th December 2021, About 3 years ago

Hi Rita. I'm confident what I said was correct. If you google the subject, you fill find many posts by solicitors stating the same.

Wyn Burgess

7:58 AM, 11th December 2021, About 3 years ago

Why not deflate the claim by appointing a managing agent and/or solictitor if necessary then going through the Section 20 process to notify the repairs to the lessees using an experienced surveyor to seek tenders from contractors (including any nominated by lessees)? At least then you can prove you are not being inactive about the issues.
My experience with managing agents is that getting the £££ from lessees is fraught but you do need most of the £££ banked before works start. The usual defence to payment is why should I (on the ground floor) pay for a leaking roof above the 2nd floor flat? Recourse to the lease terms is needed, one MA had to start forfeiture proceedings before suddenly a cheque materialised. The other claim will be that neglect has increased the cost of the repairs, this needs careful thought but you can usually agree that lessees are correct but the increase is offset by the saving of say only scaffolding the property once instead of twice had it being properly maintained.
PS Not looking for work, too many existing clients.


10:02 AM, 11th December 2021, About 3 years ago

Service charge funds don't belong to the company, they belong to the leaseholders. The company only has money from ground rent (and maybe the odd admin fee) if any. These funds are protected by the Landlord and Tenant Act 1987 Section 42 and nothing to do with insolvency. If there is money in the ground rent account then that is potentially at risk.
You presumably have insurance - I suggest you contact them and see what help you can get under the legal cover.
The question is why has the work not been done? If you as a board are not able to keep the terms of the lease (which will almost certainly require you to keep the communal areas in good repair) then you should get a professional manager. "We have offered to address the disrepair in the near future" would be too vague for me if I were an owner there. Also the property condition will probably get worse. To do that amount of work you need to do a Section 20 consultation process.
20 is a lot of directors and to manage that then maybe it should be divided into groups of say 5 to look after different aspects. What does is say in the articles? There is usually a minimum and maximum.
Is there a mutual enforceability clause? This could require the claimant to fund the case, although it's tricky as they are one of the directors too.
You need proper specific professional advice both on management and legal aspects. Whether or not you raise the funds over time, if the property is not in good repair you are all in breach of the lease. £7000+ each is a lot of money.
Where does £60,000 from loss of rent come from? Seems very high and if the property is not rentable then you should address it as a matter if urgency.

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