Facing Liquidation – what if your books and records are inadequate?
A common query we will get is from Directors who are concerned that they have not adequately kept the company’s books and records and that this will be a problem if they place the company into liquidation. The law is specific on this matter. Section 286 of the Corporations Act requires that a company must keep financial records that record and explain its transactions, financial position, performance and would enable true and fair financial statements to be prepared and audited. So, 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, the company must have maintained financial records but that is a requirement short of actually preparing financial statements. So you should not read the above requirements as meaning that the company must have actually prepared financial 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 liquidation, it is not necessary to incur the expense of having your accountant prepare financial statements up until the date of liquidation. But 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. Those laws can make a director personally liable for the debts of the company that are incurred after the date of insolvency. In the old days, 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, 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.