How the records can rescue a company director
How the records can rescue a company director is quick post taking a look at how company records can help a Director as opposed to being a compliance burden.
There is indeed a compliance obligation for a company director to keep proper books and records by virtue of Section 386 of the Companies Act 2006. This is a cardinal principle and one of the key Director Duties.
Directors are akin to trustees of the company’s assets. Safeguarding those assets and being able to account for them is fundamental.
If challenged as to the purpose of transactions by a liquidator when a company enters insolvent liquidation a director would likely be assisted if he or she could go further than rely upon bare assertion. Ideally, a Director should be able to demonstrate from the company records the purpose of all transactions which are likely to be considered by a liquidator.
Problems typically arise when company records are unavailable or simply were not created at the relevant time to evidence transactions and their purpose. The liquidator may be left with a bank statement and the director’s explanation, from which he or she will have to decide if indeed it was undertaken in good faith for a proper purpose.
If company directors make payments from their own personal resources on behalf of the company this can be all the more important. Without adequate contemporary records, it might be difficult to link such payments to the company. A company director can be left reliant upon mere assertion.
It is perhaps relevant to highlight what happened in the case of Toone & Anor v Robbins & Anor  EWHC 569 (Ch) where the Directors were challenged by liquidators on various payments from the company to themselves.
This was, in fact, a case where part of a first instance court decision was appealed. The Honourable Mr Justice Norris dealt with the appeal and made the following pertinent remarks in explaining why the burden was on the Directors to satisfy the court:
I take as my starting point the ruling of the Chief Registrar that there was an absence of clear evidence one way or the other, so that he had to decide the matter on the burden of proof. The nature of the burden of proof was conveniently summarised by Lesley Anderson QC in Re: Idessa (UK) Ltd  EWHC 804 (Ch) at paragraph  in this way: –
“I am satisfied that whether it is to be viewed strictly as a shifting of the evidential burden or simply an example of the well-settled principle that a fiduciary is obliged to account for his dealings with the trust estate that [Counsel] is correct to say that once the liquidator proves the relevant payment has been made the evidential burden is on the Respondents to explain the transactions in question. Depending on the other evidence, it may be that the absence of a satisfactory explanation drives the Court to conclude that there was no proper justification for the payment. However, it seems to me to be a step too far for [Counsel] to say that, absent such an explanation, in all cases the default position is liability for the Respondent directors. In some cases, despite the absence of any adequate explanation, it may be clear from the other evidence that the payment was one which was made in good faith and for proper company purposes”
I agree with this summary.
The next section of the judgment shows the importance of how records, had they been available, might possibly have assisted the directors. In particular, it was through the absence of records that the Directors appear to have been in difficulty:
Once the Chief Registrar had decided (as he did) that in the absence of clear evidence one way or the other he had to determine the issue by reference to the burden of proof then (there being no dispute that the company had made the payments to the Directors) the benefit of any doubt had to be given to the Joint Liquidators (not to the recipients of the company’s money). This is entirely in accordance with principle. Directors who receive money from the company cannot be heard to say: –
“We have received company money: but our record keeping is so bad that the basis upon which we received it is unclear. So by reason of our defaults we ask you to assume in our favour that we took the money lawfully”.
So when you are undertaking transactions as a company director, make sure you keep contemporaneous records as to the purpose of transactions. Reconstructing this years later is fraught with difficulty and can be very costly indeed if you are unable to satisfy someone of your good intentions.
Disclaimer: This post ‘How the records can rescue a company director‘ 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.