Directors need to keep records for themselves and their own protection as well as to comply with legislation.
What Records Does A Director Need To Keep?
A director needs to keep records that evidence their company transactions. This is required by both company legislation and tax legislation.
Although company legislation appears to have less stringent requirements to the tax legislation there is substantial overlap between the two.
Company Records Legislation
Section 386 of the Companies Act 2006 refers to the records that a company director must keep:
- Duty to keep accounting records
- Every company must keep adequate accounting records.
- Adequate accounting records means records that are sufficient—
- to show and explain the company’s transactions,
- to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and
- to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).
- Accounting records must, in particular, contain—
- entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and
- a record of the assets and liabilities of the company.”
What Are Company Transactions?
Company transactions are typically its sales and purchases in relation to its trading activities. It might also be its purchase and sale of assets that it uses to enable it to trade. The assets might be financed if the company has insufficient funds to buy them outright.
In addition, a company will have many other transactions such as transactions relating to payments to employees and to the directors themselves.
In essence company transactions are any financial payments or receipts through its bank account of any description.
Why Company Directors Ought To Keep Records
The starting point is that a company director ought to keep records to comply with legislation. However, whilst this a fundamental requirement it is unlikely to be a good idea and stick to the bare minimum requirements. There is a need for records as follows:
- to enable company directors to know what the position of the company is from time to time
- so that company directors can explain and justify the transactions that they have entered into
- in order so that a company director’s entitlement to remuneration or dividends has been correctly documented
- to show that company directors have complied with other legislation when such matters are queried by regulators
The reason being that if there is a problem later and the company records that have been kept do not show the purpose and motivation for transactions then a director can run into difficulty if a transaction is challenged.
If a company director find themselves challenged about a transaction, for example only, by a Liquidator if the company has entered insolvent Liquidation then it is going to be important for a director to be able to demonstrate why they entered into the transaction. The best way to do that is to have retained records relating to all company transactions to address such a position.
The key point to realise is that the obligation is on the director to explain the transaction.
What Happens If There Are No Records?
If there are no records then the ability of a director to explain a transaction is going to be much more difficult. You are relying on being believed about the purpose of a transaction instead of having anything other than your word.
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