Many company directors and owners don’t understand their responsibilities under the Companies Act.
In particular, they’re unaware of their legal requirement to keep accounting records that, according to the legislation:
- Correctly record the transactions of the company; and
- Will enable the company to ensure that the financial statements of the company comply with generally accepted accounting practice; and
- Will enable the financial statements to be readily and properly audited.
That’s pretty heavy stuff. It gets even heavier when you realise that the failure to keep proper records could mean directors are personally liable for their company’s debts.
Think it doesn’t happen? Think again. In the recent court case in Gisborne of Grant v Gifford liquidators of K-Pack International (KPI) sought declarations that KPI’s sole director, Kenneth Gifford, be held:
“…personally liable for debts incurred by the company as a result of poor record-keeping during the period prior to liquidation.”
The judge found in favour of the liquidators. Gifford was liable for the company’s debt to its creditors of just over $87,000. He was also ordered to pay the plaintiffs an extra $45, 000, which was a hefty proportion of their net fees and disbursements.
Ouch. As the court ruled, all this pain came about because Gifford, as sole director, failed to:
- Prepare the company’s financial statements for several years in accordance with generally accepted accounting practice
- Introduce measures or systems to track the company’s position and performance, including the keeping of an asset register, invoices and inventory; and
- Provide adequate information to the accountant
Those three big failures added up to one giant failure. It could have been so much different.
If proper records had been kept, Gifford would have done more than just fulfil his legal responsibility under the Companies Act. He, or his sadly-ignored accountant, could also have identified and resolved financial issues before the liquidators came in. Sadly, he didn’t fulfil his responsibilities. He didn’t see what was coming, and he couldn’t act as a result.
The thing is, it is quite easy to stay out of a pickle like this. With some professional advice, keeping accurate financial records is highly manageable. And given the obligations you might have under the Companies Act, seeking that advice is essential. Give us a call and we’ll help you stay on the right side of the law.