Consequences of failing to maintain a company’s books and records

In the recent decision of In the matter of Swan Services Pty Limited (in liquidation) [2016] NSWSC 1724 the Supreme Court of New South Wales re-affirmed the circumstances in which a company’s failure to maintain books and records will invoke a presumption of insolvency.

Pursuant to section 286(1) of the Corporations Act 2001 (Cth) (the Act) a company is required, for a period of 7 years, to maintain books and 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.  Section 588E(4) of the Act provides for a presumption of insolvency throughout a period in which a company has failed to keep financial records as required by section 286(1).

The Court outlined two circumstances where the presumption will arise:

  • The company kept no documents within the description “financial records” in the period.
  • The documents that were kept were deficient as to content.

In concluding that the books and records of Swan Services Pty Limited (in liquidation) (the Company) were deficient, the Court referred to evidence adduced by the liquidator that outlined:

  • he was unable to locate any signed financial statements (apart from 1 year) for the years prior to his appointment;
  • the management accounts for the Company that were available were prepared 6 months prior to the date they purportedly related to; and
  • there were discrepancies between income recorded in the unsigned financial statements and income tax returns lodged with the Commissioner of Taxation.

Whilst there were books and records that fell within the broad definition of “financial records” under the Act, these documents did not enable true and fair financial statements to be prepared. Although it was ultimately held that the Company was insolvent, the Court took the view that this was unnecessary to establish when the presumption was invoked.

The decision in Swan is a timely reminder to directors of their obligations to maintain adequate books and records.

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