Can a Director Contract with Themselves? How to Properly Handle Conflicts of Interest and Board Approval | FY2023 Condominium Management Exam Q29 | No. 120 | Exam Prep for Condominium Management Consultant and Management Business Chief
Hello, this is Neko-Ojisan.
This time, I will take up a question that is easy to stumble on regarding the "line between board authority and general meeting resolutions" from the points concerning the board of directors and auditors in the Standard Condominium Bylaws.
A similar question exists for complex-type bylaws, making it a theme that is easy to confuse.
If you are short on time, read this!
・Correct option: 4 (Board approval required)
・General meeting resolution required to order building diagnostics (using repair reserve funds)
・Auditors cannot convene a board meeting themselves
・You can still be an officer even during a lawsuit for arrears
Problem Statement
Condominium Management Consultant Exam FY2023 (2023) Q29
Regarding the following descriptions of management association officers and the board of directors, which one is appropriate according to the Standard Condominium Bylaws?
1: A unit owner being a defendant in a lawsuit for unpaid management fees, etc., where the management association is the plaintiff, constitutes grounds for disqualification as an officer.
2: Auditors have the authority to conduct operational and accounting audits, and may convene a board meeting themselves at any time to report on the execution of operations or the status of assets to the directors.
3: When requesting a contractor to perform building diagnostics to examine the details of large-scale repair work, the management association's board of directors may order the building diagnostics based solely on the board's judgment, without going through a general meeting resolution.
4: In a management association where a Condominium Management Consultant is serving as a director as an external expert, if the association enters into a contract with said consultant for the creation of a long-term repair plan, said consultant must obtain the approval of the board of directors.
Summary of the Problem Statement
1: Can't you become an officer if you become a defendant in an arrears lawsuit?
2: Can an auditor open a board meeting by themselves?
3: Can you order building diagnostics with just the board of directors?
4: Is approval required when a director contracts with themselves?
Judgment of Each Option
1: Incorrect
There is no "being a defendant in an arrears lawsuit" as grounds for disqualification for officers.
2: Incorrect
Auditors can "request the convocation" of a board meeting, but they cannot convene one themselves (Standard Condominium Bylaws Article 41, Paragraph 4).
3: Incorrect
Since building diagnostic costs are paid from the repair reserve fund, a general meeting resolution is required.
It cannot be ordered by the board of directors alone.
4: Correct
A director entering into a contract with themselves constitutes a conflict-of-interest transaction, and it is necessary to explain the important matters at a board meeting and obtain approval (Standard Condominium Bylaws Article 37, Paragraph 2 comment).
Neko-Ojisan's Stumbling Point Explanation
Q3
"For survey costs for large-scale repairs, I recall that in a complex, it could be resolved at each building's general meeting, not the complex-wide general meeting. So, couldn't it also be resolved by the board of directors instead of a general meeting?"
Neko-Ojisan often stumbles on this problem by thinking this way.
It is true that in complex-type condominiums, survey costs for large-scale repairs can sometimes be resolved at a building general meeting.
However, that is a special case where authority is clearly delegated by the complex bylaws.
In a general management association, costs incurred for building diagnostics are paid from the repair reserve fund.
The board of directors can only freely use funds within the scope of the general account, and approval from a general meeting is required when using reserve funds.
Therefore, you cannot order building diagnostics with just the board of directors.
It is like "signing up for a health checkup using your savings without consulting your family."Because it is everyone's money, you cannot use it on your own.
Building diagnostic costs are paid from the repair reserve fund.
The board of directors cannot freely use those reserve funds.
Therefore, it is necessary todecide at a general meeting whether it is okay to request the diagnostics.
On the other hand, if a condominium management consultant is among the board members in Question 4 and that person is contracted to create a long-term repair plan, that board member will hold two roles: 'Board Member (Representative)' and 'Contractor'.
This constitutes a conflict-of-interest transaction, similar to contracting with oneself.
To avoid unfairness or suspicion, the details must be explained at a board meeting and approval must be obtained from the other board members.
However, since this is more a matter of contract fairness than directly using reserve funds, board approval is sufficient, and it does not need to be brought to a general meeting.
Because a contract between a board member and the association constitutes a conflict-of-interest transaction, approval must be obtained at a board meeting to maintain fairness.
A general meeting resolution is not required.
Summary of How to Remember and Think About It
・Repair Reserve Fund = 'Everyone's Savings' → General meeting resolution required when using
・General Account = 'This Month's Living Expenses' → OK within the scope of the board
・Board Member Contracts with Themselves = 'Conflict of Interest' → OK with board approval
It is easier to organize if you distinguish between the 'nature' of the money being used and the 'fairness' of the contract.
🌀 Points to Watch Out For (Trick Questions)
・An auditor can 'request' a board meeting but cannot 'convene' one
・Resolution authority differs between complex-type and standard-type condominiums
・Acts of using reserve funds always require general meeting approval
📚 Be sure to check out the related articles too!
▶️ No. 9
We organize whether a board member involved in a matter can vote, using the articles and comments from the Standard Management Bylaws.
This is a piece that deepens your understanding of the conflict-of-interest theme covered here.
▶️ No. 30
We explain in an easy-to-understand way, using articles and examples, why an auditor can 'request' a board meeting but cannot 'convene' one.
I hope this article helps you understand even a little bit.
When it comes to the relationship between board authority and the general meeting, you won't get confused if you judge by the 'type of money' rather than the numbers.
I am creating navigation articles that categorize the themes of past exam questions.
Please use them when you want to find your weak areas or check what kind of themes exist.