New legal sector insights from Nath Solicitors:-
Section 386 of the Companies Act 2006 imposes a duty on companies to keep adequate accounting records. This means maintaining records that sufficiently show and explain financial transactions in which the company is involved and that show the financial position of the company at any given time. Government guidance on running a company explains that directors should ensure there is a record of:
- All money spent by the company; and
- All money received by the company
When adequate records are not maintained the personal repercussions for directors can be extreme. In a recent case involving the liquidation of a small digital marketing company, Wow Internet Limited, the sole director was required to repay £52,000 to the liquidator of the company – largely because he was unable to rely on any accurate financial records to prove that certain payments had been made for the benefit of the company. Here we consider the case and explain why it’s important for directors who may be tempted to adopt an informal approach to financial record keeping to be aware of the risks.
Wow Internet Limited
In the course of liquidating Wow Internet Limited the liquidator identified a number of payments from company accounts that could not be explained by any of the records kept b the company. In his evidence the sole director, Mr Qasim Majid sought to establish that the payments – totalling £52,000 – were in fact payments made for the benefit of Wow’s employees and payments to company suppliers. Significantly Mt Majid was unable to rely on any financial records to back up these claims of justification of the payments.
The judge decided that Mr Majid must personally pay the £52,000 that was unaccounted for. In doing so he highlighted that once a liquidator identifies payments that are unsupported by adequate records it’s the director’s obligation to provide a satisfactory explanation as to why those payments were legitimate. In this case Mr Majid was simply unable to do this. It wasn’t open to the director in a situation like this to invite the court to assume that the payments were genuine and made in good faith.
The Need For Care When Documenting Corporate Transactions
It is the obligation of the director once unclear payments have been identified to provide a satisfactory explanation as to why those payments were legitimate.
To be clear, if – as here – the directors of a company conduct the business informally and take a ‘lackadaisical approach to the supply of contemporaneous documentary evidence’ (the words of the judge) they do so at their own risk. Their lack of care should in no way enable them to take advantage of a lower standard of compliance than that applied to directors who approach recor d keeping in the required manner.The judge was perfectly entitled to draw adverse inferences from the director’s failure to maintain company records.
Comment
We think this is a significant decision. It highlights the need for directors to understand their duties and realise that a failure to comply with their legal obligations can result in personal liability. If you are a director or are setting up a company, Nath Solicitors in London can provide specialist advice on the steps you need to protect yourself, including advising on the most appropriate corporate structure for your business.
Contact Nath Solicitors in London
For more information please contact our director Shubha Nath at Nath Solicitors on 44 (0) 203 670 5540 or contact the firm online.
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