What if I haven’t kept the company financial accounts up to date?
Directors are often concerned that they have not adequately maintained the company’s books and records and that this may be a problem if they place the company into liquidation.
The law does have something to say about this topic. The Corporations Act (Section 286) requires that a company must keep written financial records that correctly record and explain its transactions and financial position and performance and would enable true and fair financial statements to be prepared and audited. That obligation to keep financial records extends to transactions undertaken by the company as trustee of a trust. The financial records must be retained for seven years.
And, yes, it is an offence if a company has not complied with the above requirements.
But there are a few things to consider if you are a director and you are concerned the books and records are inadequate. Firstly, you should not read the above requirements as meaning that the company must have prepared financial statements up until the date of liquidation. The company must have maintained financial records but that is a requirement short of actually preparing financial statements (such as balance sheet and profit and loss statements). Take note of the words “would enable true and fair financial statements to be prepared”. There is case law that confirms that as long as the company kept books and records that would have allowed financial statements to be prepared, it is unnecessary to actually prepare the financial statements.
So if you are considering placing your company into liquidation, it is not necessary to spend many hours or incur the expense of having your accountant prepare financial statements up until the date of liquidation.
Be aware that after you place the company into liquidation, the Liquidator will send you a Notice requiring you to deliver all of the company’s books and records, usually within two weeks of the date of liquidation.
There is one extra word of warning for a director. If you have not kept adequate books and records, or if the books and records are lost, then you need to be concerned about the Insolvent Trading laws. Insolvent trading laws can make a director personally liable for the debts of the company that are incurred after the date of insolvency. It was often a problem for a liquidator to prove insolvency when a director had “lost” or never prepared books and records. As a result, a few years ago, the law was amended so that if a director has failed to keep books and records or fails to deliver books and records to the liquidator, then the liquidator is allowed to “presume” that the company was insolvent for the period of time when books and records were not kept. You can read more about this topic on our insolvent trading page.