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Importance Of Keeping Property Service Charge Records

The case of Secretary of State for Business, Energy And Industrial Strategy v Joiner [2023] EWHC 1032 shows how important it is to keep adequate property service charge records.

It appears the Court said the Director, Dudley Joiner, did not do so (or did not deliver them up) which hampered investigations into transactions undertaken in respect of residential service charge monies overseen by the company, Team Property Management Limited (“Team”). Mr Joiner was the sole Director of Team.

Team went into Compulsory Liquidation. The Official Receiver investigated the conduct of Team but it seems struggled to do so because of the records provided by the Director.

The Court appeared unimpressed by the suggestion from Mr Joiner about the adequacy of the accounting records, notwithstanding they had been arranged in colour-coded fashion. It was more concerned about the content of such records:

I reject Mr. Joiner’s contention that the adequacy of the accounting records kept by Team is demonstrated by his evidence that he arranged for the keeping of colour-coded and clearly-labelled lever arch files (of which there are photographs of the spines in the trial bundles), complemented by parallel information which he asserts was kept on an electronic accounting system. That contention does not even touch on the issue of adequacy, which depends on a review of the contents of those records.

What Are Residential Service Charges?

Service charges where residential leaseholders are concerned, are monies required to maintain the common parts of a building. The management of service charge monies, therefore, involves looking after monies belonging to the leaseholders who have pooled funds as typically required under their leases. It is therefore a responsibility that is a fiduciary duty. In this context, it means service charge monies are held in trust to enable the leaseholders to discharge their obligations to the freeholder.

It is the matter of what happened to service charge monies that culminated in the Secretary of State bringing Director Disqualification Proceedings against Mr Joiner. He was disqualified for nine years. 

The Secretary Of State’s Complaints

The Secretary of State considered the unfitness of Mr Joiner in respect of how Team operated. It had the following complaints:

  • Did not ring-fence and protect funds.
  • When a management agreement was terminated he did not ensure funds were returned to a relevant customer.
  • Failure to keep proper company accounting records or produce them to the Official Receiver.
  • That in turn made investigation of payments to Mr Joiner and or parties connected to him impossible to verify.
  • Management fees paid to Team in respect of a customer appeared in excess of what Team was entitled.

At the heart of this case were two key issues:

  1. Mixing of monies.
  2. Records seemingly unavailable it seems to justify payments.

Production Of Records To The Insolvency Service

The Official Receiver is a civil servant who is employed by the Insolvency Service.

Initially when a company is subjected to a Winding Up Order and therefore placed into Compulsory Liquidation the Official Receiver is appointed as the Liquidator. In the case of Team, the Official Receiver was replaced by Insolvency Practitioners. However, the party that usually is responsible for Director Disqualification enforcement is the Secretary of State via the Insolvency Service.

Mixing Monies

Given service charge monies are held in trust so that leaseholders as a class or group can comply with their obligations to the freeholder / landlord, such funds ought not be mixed with monies belonging to other parties:

In my judgment, Mr. Joiner exhibited a serious lack of concern for the basic obligations to which Team was subject under its property management agreements, being obligations of which he was fully aware. He was responsible for placing Team in breach of its duties in a systematic fashion, and his basic approach to property management had the consequence that money belonging to different clients was mixed together. I do not accept the contention that this is how all the big property management companies operate The money belonging to Quadrangle in particular, which was decanted from the dedicated current account into the 7345 savings account, should have been ring-fenced but it was not: it was mixed with funds from other sources, and flowed out of the 7345 savings account to a range of beneficiaries including beneficiaries without any connection to Quadrangle, and without Mr. Joiner having obtained authority from Quadrangle to act in this manner. I therefore find that the first part of Allegation 1 is proven by the Secretary of State.

Keeping Adequate Accounting Records

The matter of what records a company must keep is a core director duty. This is unsurprising because, without records, review of company transactions and dealings is all the harder.

In this case, the Court was not satisfied with either the pace of progress with which Mr Joiner provided the electronic accountancy records to the Official Receiver or the absence of data on a computer provided.

It appears that the Official Receiver was hampered in his or her ability to investigate transactions that appeared to warrant review in relation to the service charge monies.

The Court had this to say about matters:

107. Finally in relation to Allegation 2, it is necessary to address the failure by Mr. Joiner to produce the electronic accountancy records for Team on the Sage system. Mr. Arumugam devoted considerable attention in cross-examination to questioning Mr. Joiner about his delays in providing such records to the Official Receiver, over many months, despite repeated promises. It was established that:

i) The existence of those electronic records was disclosed by Mr. Joiner on 6 December 2017; Mr. Joiner was specifically asked to provide the Sage records or the computer on which they were held at the end of his interview with the Official Receiver that day;

ii) Mr. Joiner failed to deliver those electronic records promptly, resulting in an undertaking being given to the Court in this regard, on 23 February 2018;

iii) There were then successive requests for the Sage records. Mr. Joiner purported to provide the Official Receiver with links to the Sage records by email in March 2018, but those links did not work;

iv) On 25 May 2018, Mr. Joiner apologised for the delay, saying it was taking longer than anticipated to separate data on the computer. There was only one person who could do that (which he clarified in his oral evidence was his son Steven) “and he has been overloaded due to GDPR compliance.” Mr. Joiner said he hoped to have the problem sorted in the next few days.

v) When the computer was finally given to the Official Receiver on 23 November 2018 (over a year after Team entered liquidation on 20 November 2017), the computer was found by the Official Receiver’s forensic unit to have no material data on it. Arumugam suggested in cross-examination that Mr. Joiner had “wiped it.” Mr. Joiner responded: “I had no cause or the ability to delete files from that computer”, which was not a fully satisfactory answer. I make no finding that Mr. Joiner did act positively to frustrate the Official Receiver, but I do note that (i) even if he did not personally have the ability to delete files from the computer others were likely to have done, and (ii) if the electronic records of Team did not support Mr. Joiner’s arguments in all respects, then there would indeed be a motivation to delete the files.

108. In summary, the thrust of Mr. Joiner’s evidence on this topic was that he was not close to the workings of the Sage accountancy system. He left it to others, including a lady called Sandra Lynch, Team’s original property manager who set up the system initially, and then a lady called Katherine Annis, who was formerly Team’s bookkeeper. He said that it was Ms Annis on whom he had relied to send the electronic information to the Official Receiver in 2018. He explained in his oral evidence that the professional relationship with Ms Annis deteriorated in that period, for various reasons which he outlined, and that although she had assured Mr. Joiner that she had sent electronic information to Mr. Pomfrett of the Official Receiver, on reflection he now had cause to re-evaluate what she had said to him. He was unable to explain how it came to be that the computer eventually delivered up to the Official Receiver had no relevant information on it, but said that at all times he was doing his best to cooperate.

109. In my judgment, this cannot be accepted as a sufficient explanation for the failure to deliver up any of Team’s electronic accountancy records to the Official Receiver. Putting it no higher, Mr. Joiner’s lack of action over many months in seeking to ensure that those who were familiar with the system and with the way the computer worked to identify and extract the relevant electronic accountancy records for Team was lamentable.

What Next?

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Disclaimer: Importance Of Keeping Property Service Charge Records

This page is not legal advice and should not be relied upon as such. This Importance Of Keeping Property Service Charge Records article is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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