Usain Bolt flashed through the 100 metres at the London Olympics in 9.63 seconds - a new Olympic record. Imagine the uproar there would have been if, at the end of the race, the officials had asked, 'What is the current record?' only to be told, 'I don't know. It's not written down anywhere. From memory it's about ....'
Accurate records need to be kept for many different reasons, and in relation to companies the requirements are set out in the Companies Act 1993 and also the Tax Administration Act 1994.
Accounting records to be kept - Section 194 Companies Act 1993
The board of a company must cause accounting records to be kept that -
- Correctly record and explain the transactions of the company; and
- Will at any time enable the financial position of the company to be determined with reasonable accuracy; and
- Will enable the directors to ensure that the financial statements of the company comply with section 10 of the Financial Reporting Act 1993 and any group financial statements comply with section 13 of that Act; and
- Will enable the financial statements of the company to be readily and properly audited.
The section goes on to describe the type of information that the accounting records must contain and this includes details of money received and spent each day and the matters to which it relates, a record of the assets and liabilities of the company and, if the company's business involves dealing in goods, a record of the stock bought and sold.
The records must be kept in English or in a form or manner that is easily accessible and convertible into written form in English.
If the board of a company fails to comply with these requirements every director commits an offence and is liable on conviction to a fine of up to $10,000.
However, the problems don't necessarily stop there for the director of a company that has failed to maintain proper accounting records, as Selvathas Ariyathas discovered in a recent case decided in the High Court in Auckland (Walker v Ariyathas HC AK CIV-2011-404-1894).
If a company goes into liquidation the liquidator may seek an order pursuant to Section 300 of the Companies Act 1993 making the directors personally liable for all or part of the company's debts.
If the Court considers that the failure to keep proper records has -
- Contributed to the company's inability to pay all of its debts; or
- Resulted in substantial uncertainty as to the assets and liabilities of the company; or
- Substantially impeded the orderly liquidation
Then the Court may, if it thinks it proper to do so, declare that any one or more of the directors and former directors of the company is or are personally liable for all or any part of the company's debts and other liabilities.
In Mr Ariyathas' case the Court made an order that he was to pay the liquidator $998,505 plus interest and costs.
But keeping proper accounting records isn't only about compliance with the law. The records are a very important tool for company directors to use in their day-to-day operation of the company.
A director should, at any point in time, be able to refer to the accounting records to establish how their business is trading and whether or not there are issues that need addressing. Without proper records a director can not tell, with any degree of certainty, if the company is trading profitably and has sufficient cash flow to meet its liabilities.
The complexity of the records and the manner in which transactions are recorded will depend, to some extent, on the size and nature of the company but the basic requirements will remain the same.
If a company does not have a proper accounting system in place then its directors should seek advice from its accounting professional, or contact one of our business recovery specialists for advice. In the long run it could save the company and also save its directors from personal liability.
There is a requirement under the Tax Administration Act that a company's accounting records are retained for at least seven years from the end of the tax year or the taxable period that they relate to.
There are various other records that a company is required to keep at its registered office. These are set out in Section 189 of the Companies Act 1993 and include -
- The company's constitution (if it has one)
- Minutes of all meetings and resolutions of shareholders and of directors within the last seven years
- An interests register
- Certificates given by directors under the Companies Act within the last seven years
- The full names and addresses of the current directors
As with the accounting records, it is an offence to fail to comply with the requirements of Section 189 and both the company and its individual directors may be liable.
It is essential that directors protect both themselves and their companies from potential liability, and ensure that they have the financial information available to properly manage their business. We recommend that all directors look at Sections 189 and 194 of the Companies Act 1993, or discuss them with their professional advisors, to ascertain the type of company and accounting records that they need to keep.
We are happy to discuss any of the issues raised in this article. Please contact the author or any of our Partners or senior staff members.
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.