Company directors have financial record keeping duties under the Corporations Act and substantial penalties can apply for a failure to maintain adequate financial records.
What are the duties?
All companies are required to keep and maintain accurate financial records which:
- correctly record and explain the company’s transactions and financial position
- would enable true and fair financial statements to be prepared
What are financial records?
In essence, financial records:
- are broadly defined in the Corporations Act and include invoices, receipts, bills of exchange (eg. cheques), promissory notes, documents for prime entry (eg. cash books and journals) and working papers
- must be retained by the company for at least 7 years after completion of the transactions to which they relate
How are financial records to be kept?
The financial records may:
- be stored in electronic form provided they can be converted into hard copy within a reasonable period of time
- be kept in any language, however, an English language translation must be provided within a reasonable period of time if requested by a person entitled to inspect the records
- be kept overseas provided sufficient written information is retained within Australia which would enable true and fair financial statements to be prepared
What rights does a director have to inspect financial records?
- a director of a company has a right to inspect the financial records of the company
- this right is based on the director’s duty to manage the affairs of the company with due care, skill and diligence
- a company must make its financial records available at all reasonable times for inspection by a director
- if a company refuses to make its financial records available for inspection, a director may apply to the court for an order requiring the company to make its records available to the director or a person authorised by the director to inspect the records on the director’s behalf
- under the Corporations Act, a former director may also inspect the books and financial records of a company up to 7 years after they ceased to be a director of the company provided the inspection is related to current, pending or anticipated legal proceedings
- a director should negotiate access rights (usually under a Deed of Access, Insurance and Indemnity) with the company to provide a broader right of access than available under the Corporations Act
What are the penalties?
A company director who fails to take all reasonable steps to comply with their financial record keeping obligations will have breached a civil penalty provision of the Corporations Act and the court, upon application by ASIC, may:
- fine the director up to $200,000
- disqualify the director from acting as a company director
- require the director to pay damages or restitution to the company if the company has suffered loss or damage due to the director’s breach of duty
What are other ramifications?
- the director may also have committed a strict liability criminal offence and be subject to criminal prosecution
- the director may find overseas travel difficult if a criminal offence has been committed
- the director may suffer damage to their reputation
- the director’s employment or contractor arrangement with the company may be in jeopardy
- it may trigger buy-out provisions under a Shareholders Deed
- if a company is found to have contravened a civil penalty provision, the company may be liable to pay a fine of up to $1,000,000
Please contact our commercial law team at Matthews Folbigg Lawyers on 9635 7966 if you require legal advice with respect to your rights and obligations as a company director or if you would like to discuss the options available to endeavour to protect your interests.