Insolvency Network Update July 2019
Jul 10 2019
Failure to provide books and records may lead to insolvent trading
Pursuant to Section 286 of the Corporations Act 2001 (“the Act”), a company is required to keep written financial records that correctly record and explain its transactions and financial position and would enable true and fair financial statements to be prepared and audited. Section 286 of the Act also requires financial records to be retained for 7 years after the transactions covered by the records are completed.
Financial records may include invoices, receipts, cheques, books of prime entry, working papers and other financial documents. Records may be kept electronically, however, they must be able to be printed as paper copies. Records which should be kept by a company include the following:-
- Financial statements
- Profit and loss statements, balance sheets, depreciation schedules and taxation returns.
- General ledgers and journals
- Electronic copies of critical documents
- Cash records
- Cash receipts, records of bank deposits, petty cash books and cheque butts.
- Bank statements and loan documents
- Sales and debtor records
- Invoices and statements received and paid
- Correspondence, annual returns, wage records and superannuation records.
- Any unpaid invoices
- Minutes of members’ or directors’ meetings
- Resolutions passed by directors or members should be minuted.
- Registers
- Members, options, debenture holders, assets or any other relevant items.
- Deeds
- Deeds of trust, debentures, contracts and agreements, or any inter-company transactions.
Section 588E(4) of the Act provides that the company may be deemed to be insolvent during the period if it is proved that the company:-
(a) has failed to keep financial records in relation to a period as required by subsection 286(1); or
(b) has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2);
If a director fails to provide a Liquidator with the company’s books and records, the Liquidator is able to rely on the presumption of insolvency and commence a recovery proceeding against a director for insolvent trading. The consequences of insolvent trading include a civil penalty of up to $200,000 and/or compensation for amounts lost by creditors being all debts incurred whilst the company was insolvent and not paid by the company.
In a recent case heard in the Supreme Court of New South Wales, Substance Technologies Pty Ltd [2019] NSWSC 612 (“Substance Technologies”), the Court found that the company had failed to comply with its Section 286 obligations and consequently, the Liquidator could rely on the presumption of insolvency under Section 588E(4) for the following reasons:
- The company had not lodged Income Tax Returns or Business Activity Statements since 2013;
- The Company’s accountant did not have any financial records for the final years of operations; and,
- The company’s directors had failed to cooperate with the Liquidator’s requests for books and records.
The Court ordered compensation under Section 588M(2) of the Act against one director of the company in the amount of $128,901 and the second director in the amount of $15,377. The directors were also required to pay the costs of the application.
Directors must ensure that their company complies with Section 286 of the Act or they could find themselves defending a claim of insolvent trading.