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The Role of a Director: Duty to maintain books and records

22 July 2016

A Director, or a person who acts as a Director of a company, has a general duty to maintain books and records that adequately record and explain all the company's dealings.

The Corporations Act 2001 provides in Section 286 that a company, registered scheme or disclosing entity must keep written financial records that:

  • correctly record and explain its transactions and financial position and performance; and
  • would enable true and fair financial statements to be prepared and audited.

These financial records must be retained for 7 years after the transactions covered by the records are completed.

Section 9 of the Corporations Act defines Financial Records as including:

  • invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers;
  • documents of prime entry; and
  • working papers and other documents needed to explain:

- the methods by which financial statements are made up; and

- adjustments to be made in preparing financial statements.


 What are adequate books and records?

To assist Directors in complying with their duty to maintain adequate books and records, ASIC has reviewed the requirements of the Corporations Act 2001 (Corporations Act) and compiled a schedule of appropriate books and records (based on input from a number of professional bodies and associations) as follows: 

1. Financial Statements

  •  Profit & Loss accounts
  •  Balance Sheets
  •  Depreciation Schedules
  •  Taxation Returns e.g. income tax, PAYG Tax Withheld, superannuation, fringe benefits tax, business activity statements, Workers Compensation and all supporting documents. Official signed copies of Annual Accounts with Directors' Statement, Chairperson of Director's Report, Secretary's Declaration and Auditor's Report.

2. General Ledger posted and balanced to date of Administration


3. General Journal with clear descriptions of all entries

 
4. Asset Register
 
5. Computer Back-up Discs

- Frequency - suggest at least monthly

 
6. Cash Records

  •  Cash Book reconciled to date of Administration
  • Cash Receipts Journal
  •  Bank Deposit Books
  •  Cash Payments Journal
  •  Cheque Butts
  •  Petty Cash Books

7. Bank Account Statements, Bank Reconciliations and Bank Loan Documents
 
8. Sales/Debtor Records

  •  Sales Journal
  •  Debtors Ledger
  •  List of Debtors
  •  Invoices & Statements issued
  •  Delivery Dockets

9. Work in Progress Records
 
10. Job/Customer Files
 
11. Stock Listings
 
12. Creditors Records

  • Purchase Journal
  •  Invoices & Statements Received & Paid
  •  Creditors Ledger
  •  Unpaid Invoices

13. All Correspondence, Annual Returns and ASIC forms

  •  Correspondence in and copies of correspondence sent out

 
14. Wages Records and Superannuation Records
 
15. Registers (where applicable)

  •  Members
     
  •  Options
  •  Debenture Holders
  •  Prescribed Interests
  •  Charges
  •  Unclaimed Property

16. Minutes of Meetings of Directors and/or Members

  •  Directors Minute Book
  •  Members Minute Book

 
17. Deed (where applicable)

  •  Trust
  •  Debentures
  •  Contracts & Agreements e.g. HP and leases
  •  Inter-company transactions, including guarantees

18. Other

  •  Certificate of Incorporation
  •  Memorandum & Articles of Association
  •  Common Seal and, where applicable, Share Seal
  •  Copies of any contracts entered into including Hire Purchase and Leasing Contracts
  •  Titles to any land owned
  •  Certificates for any shares or other securities owned
  •  Motor Vehicles Registration Certificates
  •  Any other documents, Titles or Articles which relate to the Company and should be in the Liquidator's control

Additionally, a Director has the following duties:

  • A duty not to trade while insolvent. A company is insolvent if it is unable to pay its debts as and when they fall due. A Director should always have an understanding of the current financial position of the company and not allow the company to incur any debt that it is unable to pay.
  • The books and records maintained should adequately record and explain all the company's dealings. The failure to maintain adequate books and records may cause a presumption of insolvency, if a Liquidator is appointed and commences an Insolvent Trading action.

The importance of adequate books and records

The maintenance of adequate books and records assists a Director to have an accurate understanding of the company's financial position. This is particularly important if the company is experiencing financial difficulty, as the financial records will  signal to a Director when to seek help.

The failure to maintain adequate books and records may cause a presumption of insolvency, if a Liquidator is appointed and commences an Insolvent Trading action.

Additionally, there are serious consequences for a Director who fails to fulfil his/her duties. These consequences may affect a Director personally. A Director may face civil penalties for breaches of his/her duties.

In certain circumstances, a Director may also be disqualified from holding a position as a Director or managing a company for a period of time.

Action

To fulfil your duties as a Director and avoid any penalties, charges or disqualification, it is important that your company maintains adequate, timely books and records for the required period of at least 7 years.

It is vital to seek independent, professional advice if you are unsure of the form and content of the financial records that should be maintained by your company.

If you suspect your company is in financial difficulty, it is important to act immediately and obtain professional advice about the best course of action in your circumstances.

Acting promptly will not only ensure you fulfil your duties as a Director, but allow the greatest possible likelihood of being able to achieve a successful restructure and save the business and company.

Contact Rodgers Reidy now for a confidential discussion in relation to your business circumstances.

Further resources:-

1. ASIC Information Sheet 76 - What books and records should my company keep?

2. ASIC Information Sheet 42 – Insolvency: A guide for directors 

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