When it comes to maintaining books and records, company directors have significant responsibilities, especially if there are issues about a company’s solvency. A recent case highlighted how important it is for directors to keep proper records.
Insolvency case in Federal Court of Australia
In a recent decision before the Federal Court of Australia a liquidator demanded a company provide information about its financial status, along with books and other records. The director failed to comply and claimed the company’s records and assets were being held in off-site storage but didn’t provide the liquidator with access.
The liquidator successfully applied to the Court for a search warrant. When it searched the storage unit, it found the records were incomplete, disorganised and of little assistance.
The liquidator subsequently issued a claim against the director for trading while insolvent. The Court found:
- The director failed to keep proper records and
- The company was trading while insolvent.
The Court ordered the director pay almost $400,000 as a result of the failure to maintain records and as a result of trading the company whilst insolvent.
Duty to maintain proper records
An important part of this decision was the failure to maintain proper records.
Australian laws require company directors to maintain adequate financial records for at least seven years. The records can include tax returns, profit and loss statements, bank statements and anything else demonstrating a company’s financial performance.
The records must accurately:
- Show the company’s transactions
- Reflect the company’s financial position
- Document the company’s performance
Failure to keep proper records carries a penalty against the company directors. It’s a bit like a football player being reported for striking. The penalty is against the player, but the whole team feels the knock-on effects, especially if the player then cops a suspension.
Insolvency consequences for not maintaining proper records
It is important to remember that in cases where liquidators or creditors take insolvent trading action against a company, Australian laws allow a presumption of insolvency for the entire period of inadequate record keeping.
This exposes directors to:
- Personal fines up to $200,000
- Compensation proceedings by creditors or liquidators
- Bankruptcy proceedings
In addition, in cases where a director is found to have acted dishonestly, they may be charged with criminal offences and further fined up to $220,000. Imprisonment is also a possibility, as well as disqualification from holding any other directorships.
In this case, the Court found the evidence supported the presumption of insolvency because the director had failed to:
- Submit a Report as to Affairs to the liquidator
- Answer the liquidator’s questions
- Give the liquidator access to the company records and books
The lessons
Failure to keep proper records could mean the pin is pulled on your company for trading while insolvent. To avoid being pinged by a liquidator or by ASIC, make sure your records are in good order.
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DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.