Directors' Duties – Company Records

Director have duties pursuant to Section 386 of the Companies Act 2006 (formerly Section 221 of the Companies Act 1985) in relation to maintaining and retaining adequate accounting records.

Case law relating to disqualification proceedings helpfully sets out some of the issues that can arise when Directors risk falling short of the requirements:

– the records and the keeping of them
– delegation of record keeping
– purpose and nature of company records
– impact on insolvency

The Records

Robinson Healthcare Ltd v Bestlake NV and others – [2006] All ER (D) 09 (May)

139. But there are two particular points which I think it is important to emphasise. Firstly, a company’s accounting records are intended to record transactions and not to create them. That does not mean, for example, that a payment by cheque should be recorded in the company’s books as at the date on which is debited to the company’s bank account, rather than the date of issue, or that a cheque received in settlement of a debt should be entered only on the date upon which the amount in question is collected by the company’s bank, rather than on the date on which the cheque is received. Matters of this kind are governed by principles and conventions of accountancy which were scarcely touched upon in the course of the evidence. But I am quite unconvinced that, in general, subject to any such principles and conventions, it can be right to enter a transaction in a company’s books as at a date prior to that upon which the substantive transaction actually took place. This is a point which may be material to the loans write-off claim.

140. The second point which I would wish to emphasise is that a company’s accounting records are not always written up on a daily basis. In a larger enterprise, it may be essential to do so, at least in relation to sales and purchases, if accounting chaos is to be avoided. But, in the case of a smaller enterprise, the records may be written up only fairly spasmodically. Strictly, I think a record should be made as soon as practicable after any relevant transaction has taken place, in view of the company’s duty under section 221(1)(a) of the Act to keep such records as will disclose with reasonable accuracy “at any time” the financial position of the company at that time. But, in practice, such records may well be written up retrospectively on the basis of the original documents generated in the course of the Company’s activities.

Delegation

Secretary of State for Trade and Industry v Hall and another – [2006] All ER (D) 432 (Jul)

17. I will deal with the second submission first. In Re Barings Plc (No 5) [1999) 1 BCLC 433 Jonathan Parker J held that “directors have both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors “. It is well established by authority; see amongst others Re Firedart Ltd [1994) 2 BCLC p 340 that the obligation on a company to maintain proper books and records, contained in section 221 of the Companies Act, is one which falls on all directors and not simply on those to whom the job of maintaining the records has been delegated. It seems to me that the obligation to ensure that the company makes returns to Companies House is also one which falls on all directors. The obligation to ensure that the company keeps proper books and records and makes the appropriate returns places upon directors a requirement to act which they cannot avoid by a plea that the internal arrangements of the company meant that they had no management function, or, alternatively, they elected not to play any part in management.

Purpose

Secretary of State for Trade and Industry v Arif and Others
CHANCERY DIVISION, BIRMINGHAM
CHADWICK J20 DECEMBER 199520 DECEMBER 1995

Section 221 has, at the least, two purposes. First, to ensure that those who are concerned in the direction and management of companies which trade with the privilege of limited liability, do maintain sufficient accounting records to enable them to know what the position of the company is from time to time. Without that information, they cannot act responsibly in making decisions whether to continue trading. But equally important is a second purpose. If the company fails, a licensed insolvency practitioner will become office holder; as liquidator or as administrator or as administrative receiver. The office holder requires information as to the company’s trading and transactions which is sufficient to enable him to identify and recover or exploit the
company’s assets. His task is made extremely difficult, if not impossible, if the company has failed to comply with its obligations under s 221 of the 1986 Act.

Insolvency

Bishopsgate Investment Management Ltd (in provisional liquidation) v Maxwell and Another; Cooper v Maxwell and Another; Mirror Group Newspapers plc and Another v Maxwell and Others

But in practically every case in which an office-holder wanted to examine a director under section 236 there would have been a failure to keep proper accounting records.

Re Firedart Ltd, Official Receiver v Fairall [1994] 2 BCLC 340

Mr Ritchie, in his able submissions for the applicant, emphasised the failure to keep accounting records on the basis that, as this case shows, they are important both while a company is a going concern and in the event of liquidation. I accept that submission which accords with a passage I wrote in another context:
‘It is essential that officers of a company should ensure that a company maintains proper accounting records so that business decisions are made on reliable information and so that in the event of insolvency the administration of the winding up may be facilitated.’
(Buckley on the Companies Acts, Special Bulletin on the Companies Act 1989, p 10).
When directors do not maintain accounting records in accordance with the very specific requirements of s 221 of the Companies Act 1985, they cannot know their company’s financial position with accuracy. There is therefore a risk that the situation is much worse than they know and that creditors will suffer in consequence. Directors who permit this situation to arise must expect the conclusion to be drawn in an appropriate case that they are in consequence not fit to be concerned in the management of a company.

The aforesaid is not legal advice and is not to be relied upon as such. No liability is accepted by the writer for any reliance placed on the same.

If you have a specific query then you should seek independent legal advice on the same.

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