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Why Do Directors Need To Keep Records?

Directors need to keep Company 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 company records that evidence transactions. This is required by both company legislation and tax legislation.

Although company legislation appears to have less stringent requirements to tax legislation there is substantial overlap between the two.

company records needed by a director

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.

Company Records Purpose

In the matter of Secretary of State for Trade and Industry v Arif and Others CHANCERY DIVISION, BIRMINGHAM CHADWICK J20 DECEMBER 199520 DECEMBER 1995 the following was

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.

What Is Recorded In Company Records?

In the matter of Robinson Healthcare Ltd v Bestlake NV and others [2006] All ER (D) 09 (May) the nature of company records was explained and when they should be written up:

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.

Company Records And Insolvency

Company records and their importance for insolvent companies and subsequent investigations was explained in the following two cases:

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.

Company Records And Delegation

The following case demonstrates that Directors cannot delegate responsibility for company records:

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.

Author: Elliot Green
Last Updated: April 13, 2024

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Disclaimer: Why Directors Need To Keep Company Records

This page is not legal advice and is not to be relied upon as such. This article Why Directors Need To Keep Company Records is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

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