Can a company director invoice a company he owns?

[Jabiru]

For context

if you were a company director but not a shareholder. For example, a director of a residents management committee in a block of retirement apartments. You don’t own any of the apartments.

So you’re effectively appointed by the shareholders to look after the management of the block, resolve maintenance issues, pay the accountant - that sort of thing.

would it be legal for you to invoice the company from another business that you own, and pay yourself thousands of pounds for ‘work’ without getting other quotes for the same work?

if you did that, would there be any financial safeguards to make sure you weren’t just taking money from the shareholders account without anyone else having to authorise it or sign it off?

What could the shareholders expect to see in terms of invoices, evidence the work had been required or completed to a decent standard?

thanks

If the company the director owns is already providing similar services to other clients, it is perfectly legal. The other directors should ensure that the company is getting value for money. The articles of association may preclude the director about whom you are concerned from taking part in any decisions concerning awarding business to his company. If the shareholders aren't happy, they can replace the directors and/or appoint additional directors up to any maximum specified in the company's articles of association.

The issue is that the shareholders are not party to any decisions

I wouldn't expect them to be. The directors make the day-to-day decisions like this. But there must be an AGM where the directors can be voted out and new directors appointed.

The shareholders appoint the directors to run the company on their behalf. If the director isn't doing so appropriately, they can remove the director but would struggle to undo something the director has already done.

Ok thank you for your replies.

what would happen if the shareholders asked for an audit?

An audit would check that the accounts were "true and fair" I.e. materially correct which would include the accuracy and completeness of related party transactions disclosed. They would not check whether the amounts charged by any supplier are reasonable, beyond checking if the related party transactions are on an arms length basis (charged at the same rate as they would charge a non-related third party) if that is stated to be the case in the related party note, but there is no requirement to state that the transaction is on an arms length basis even if that is true.

The director also owes various duties, including to act in the best interests of the company and could potentially be in breach of those duties.

The problem with arguing that is that the legal fees are likely to be huge for no guaranteed win, especially if the costs are for business needs but charged at an excessive rate.

OP - does the company have insurance? Maybe something like fidelity guarantee insurance or references to dishonesty? If so, it could be worth a talk with the insurer to see if they would cover legal action

Thanks again.

I need to check with my MIL (she is the shareholder). But I think the only insurance is on the fabric of the building.

it looks as though the residents would be better off to draw a line under any of these issues and look towards some sort of vote of no confidence, or possibly appointing other directors.

It's a related party transaction and would need to be declared in the accounts.

It's unethical and a serious conflict of interest but not illegal (as long as the services have actually been provided and at a fair market rate).

There isn't really any recourse although if the shareholders now feel they no longer trust the Director they could remove him and appoint a new one.

There’s no evidence of the work taking place.

Some work is charged to said company but then subcontracted. For example, repairs to the driveway paid to the directors company (not a driveway company). No idea what the work actually cost.

Is it a private company OP? I am assuming it is but if it’s a public one then there are very strict rules around disclosure (much more than notes in the audited accounts, which are still necessary).

It isn’t necessarily unethical or a conflict of interest, if company 1 is paying company 2 for a necessary service that company 2 offers at a rate that a)is competitively priced against other similar companies and b)priced at a level no different (or cheaper) than other customers AND the other directors/shareholders are fine with it then there’s no issue. This particular situation, however, sounds like it definitely is unethical and in fact, fraudulent.

If this is about a freehold management company then all of the requirements for quotes etc should be in the individual leases for the properties. It’s very difficult to argue with freeholders though and some of them are awful. We had a freeholder that also owned an insurance company, despite getting other quotes, guess which company always got selected? We had to get right to manage and eventually force the freeholder to sell to the leaseholders. It’s not a quick process when they don’t want to pass on the management and certainly don’t want to sell!

The owners of the flats own the freehold as part shares.

The building is then managed by one person on their behalf. A management company was set up, he was the sole director and the owners shareholders. That person asks the owners for money every year to maintain the block. The accounts are submitted annually but there’s not much detail in them.

my MIL noticed that the director was claiming several thousand pounds every year for work that other people
were actually doing. The driveway is an example. They’d paid several thousand for ‘repairs’ to the director’s own personal business, but he had not done these repairs himself, he’d subcontracted.

The repairs were badly done. The director had basically failed to get any other quotes, he had paid his own company and this appeared on the breakdown of expenses.

the fact is, as a sole director, this person is awarding work to his own company without benchmarking prices by getting other quotes:

I wonder if he is making a profit on what the subcontractors charge. Nobody would know. I’m not sure really how to go about finding out. But it doesn’t sound entirely legal

https://companieshouse.blog.gov.uk/2020/11/12/becoming-a-director-or-member-of-a-residents-management-company/

this might be useful

would it be legal for you to invoice the company from another business that you own, and pay yourself thousands of pounds for ‘work’ without getting other quotes for the same work?

Apparently, yes. A lot of freeholders were doing just that kind of things to leaseholders. One of the incentive for a campaign that started years ago and brought a legal reform in 2002 and the the concept of commonhold on flats.

The devil is in the details, as always. For sure that kind of arrangement doesn't smell of roses.

If he is the management company it isn’t unusual for it to be in their contract that they take a percentage of the value of the work done, like a project management fee.

Correct, ours charged £15 per leaseholder for every letter sent and added 10% management fee to every expense. As well as an annual management fee. It’s normal
for there to be a fee for the management process but this sounds like a dodgy way to implement it.

there’s a company called leasehold doctors that I’ve found to be really helpful in the past (great initial free advice and also very good when actually engaged). Maybe give them a call and see if they will chat though the specifics of your MIL situation? https://www.leaseholddoctors.co.uk/

Before you call them, if possible have info like how many flats in the building, how many freeholders, how long the leaseholders have owned their leases

The accounts are submitted annually but there’s not much detail in them.

It sounds like he is filing filleted or micro company accounts possibly without a related party note included?

Shareholders are entitled to a copy of the full accounts every year, so these should be requested - the director should provide them, but the accountant will have a copy if not. At least that should give a bit of information about where the money has gone.

Was any agreement signed with the director when the company was set up?

They are micro accounts, yes. There’s no agreement in place with him in terms of what the shareholders can expect from him.

the more I learn, the worse it sounds!

Thanks for those links, they sound helpful

The repairs were badly done. The director had basically failed to get any other quotes, he had paid his own company and this appeared on the breakdown of expenses.

If you replace the director (probably requires and AGM or EGM), and appoint a new one, the new director could look into approaching whoever did this work and getting it made right by whoever was contracted to do it (the current director?) - the new director should be given access to all paperwork for the company.

It wouldn't get any money back, but if the work was completed fairly recently it might at least get it to a standard where it won't cost more to fix.

Thank you

If it’s helpful to know, in our block we get leaseholder accounts every year and these are very different to the accounts that are filed at companies house (which are just micro accounts, being headline numbers).

The leaseholder accounts detail

• a ‘profit and loss account’ detailing all expenses incurred in the year (eg insurance, repairs, electricity for communal area, gardening, whatever), compared to charges issued to the shareholders in aggregate

-the share of the expenses allocated to each leaseholder, which may be uniform across the board or not (eg one flat in our block is much larger than the other so it pays a greater % of shared overheads)

• the actual amount invoiced to each leaseholder (we pay monthly into the company account, an amount that is a bit more than the usual annual costs so as to build up a small surplus) and how much has been received, leading to a credit balance on each leaseholder (or a debit if they have not actually paid

— a very simple balance sheet - cash, debtors and creditors.